Chesapeake Energy Corporation (NASDAQ:CHK) is about to trade ex-dividend in the next three 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 important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase Chesapeake Energy's shares before the 16th of August in order to be eligible for the dividend, which will be paid on the 1st of September.
The company's next dividend payment will be US$2.32 per share, and in the last 12 months, the company paid a total of US$8.79 per share. Based on the last year's worth of payments, Chesapeake Energy stock has a trailing yield of around 9.0% on the current share price of $97.31. If you buy this business for its dividend, you should have an idea of whether Chesapeake Energy's dividend is reliable and sustainable. So we need to investigate whether Chesapeake Energy can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Chesapeake Energy paid out a comfortable 36% of its profit last year. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It distributed 38% of its free cash flow as dividends, a comfortable payout level for most companies.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see Chesapeake Energy's earnings per share have dropped 7.6% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
Unfortunately Chesapeake Energy has only been paying a dividend for a year or so, so there's not much of a history to draw insight from.
Is Chesapeake Energy worth buying for its dividend? Earnings per share are down meaningfully, although at least the company is paying out a low and conservative percentage of both its earnings and cash flow. It's definitely not great to see earnings falling, but at least there may be some buffer before the dividend needs to be cut. In summary, while it has some positive characteristics, we're not inclined to race out and buy Chesapeake Energy today.
On that note, you'll want to research what risks Chesapeake Energy is facing. To help with this, we've discovered 4 warning signs for Chesapeake Energy that you should be aware of before investing in their shares.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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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