Schlumberger Limited (NYSE:SLB) stock is about to trade ex-dividend in 3 days time. You will need to purchase shares before the 11th of February to receive the dividend, which will be paid on the 9th of April.
Schlumberger's next dividend payment will be US$0.50 per share, and in the last 12 months, the company paid a total of US$2.00 per share. Based on the last year's worth of payments, Schlumberger stock has a trailing yield of around 5.8% on the current share price of $34.51. 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 check whether the dividend payments are covered, and if earnings are growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Schlumberger paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If Schlumberger didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. It paid out 103% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Schlumberger reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, ten years ago, Schlumberger has lifted its dividend by approximately 9.1% a year on average.
Remember, you can always get a snapshot of Schlumberger's financial health, by checking our visualisation of its financial health, here.
Should investors buy Schlumberger for the upcoming dividend? We're a bit uncomfortable with it paying a dividend while being loss-making, especially given that the dividend was not well covered by free cash flow. Bottom line: Schlumberger has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
Curious what other investors think of Schlumberger? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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