Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Schlumberger Limited (NYSE:SLB) is about to trade ex-dividend in the next four days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Therefore, if you purchase Schlumberger's shares on or after the 6th of December, you won't be eligible to receive the dividend, when it is paid on the 12th of January.
The company's next dividend payment will be US$0.17 per share, on the back of last year when the company paid a total of US$0.70 to shareholders. Based on the last year's worth of payments, Schlumberger stock has a trailing yield of around 1.4% on the current share price of $51.55. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Schlumberger can afford its dividend, and if the dividend could grow.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Fortunately Schlumberger's payout ratio is modest, at just 28% of profit. A useful secondary check can be to evaluate whether Schlumberger generated enough free cash flow to afford its dividend. It distributed 42% of its free cash flow as dividends, a comfortable payout level for most companies.
It's positive to see that Schlumberger's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see Schlumberger earnings per share are up 4.4% per annum over the last five years. Recent earnings growth has been limited. Yet there are several ways to grow the dividend, and one of them is simply that the company may choose to pay out more of its earnings as dividends.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Schlumberger has seen its dividend decline 4.4% per annum on average over the past 10 years, which is not great to see. It's unusual to see earnings per share increasing at the same time as dividends per share have been in decline. We'd hope it's because the company is reinvesting heavily in its business, but it could also suggest business is lumpy.
The Bottom Line
Should investors buy Schlumberger for the upcoming dividend? Earnings per share growth has been growing somewhat, and Schlumberger is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. It might be nice to see earnings growing faster, but Schlumberger is being conservative with its dividend payouts and could still perform reasonably over the long run. There's a lot to like about Schlumberger, and we would prioritise taking a closer look at it.
While it's tempting to invest in Schlumberger for the dividends alone, you should always be mindful of the risks involved. For example - Schlumberger has 2 warning signs we think you should be aware of.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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