Devon Energy Corporation's (NYSE:DVN) dividend is being reduced from last year's payment covering the same period to $0.72 on the 30th of June. The yield is still above the industry average at 9.9%.
Devon Energy Doesn't Earn Enough To Cover Its Payments
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. The last payment was quite easily covered by earnings, but it made up 106% of cash flows. While the company may be more focused on returning cash to shareholders than growing the business at this time, we think that a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.
Looking forward, earnings per share is forecast to fall by 31.0% over the next year. Assuming the dividend continues along recent trends, we believe the payout ratio could reach 104%, which could put the dividend under pressure if earnings don't start to improve.
The company has a long dividend track record, but it doesn't look great with cuts in the past. The dividend has gone from an annual total of $0.80 in 2013 to the most recent total annual payment of $4.55. This implies that the company grew its distributions at a yearly rate of about 19% over that duration. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.
The Dividend Looks Likely To Grow
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Devon Energy has impressed us by growing EPS at 182% per year over the past five years. Devon Energy is clearly able to grow rapidly while still returning cash to shareholders, positioning it to become a strong dividend payer in the future.
Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We would be a touch cautious of relying on this stock primarily for the dividend income.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. To that end, Devon Energy has 4 warning signs (and 2 which shouldn't be ignored) we think you should know about. Is Devon Energy not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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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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