Yahoo Finance Here's Why We're Wary Of Buying Diamondback Energy's (NASDAQ:FANG) For Its Upcoming Dividend
Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Diamondback Energy, Inc. (NASDAQ:FANG) is about to go ex-dividend in just 3 days. You can purchase shares before the 12th of May in order to receive the dividend, which the company will pay on the 20th of May.
Diamondback Energy's upcoming dividend is US$0.40 a share, following on from the last 12 months, when the company distributed a total of US$1.60 per share to shareholders. Based on the last year's worth of payments, Diamondback Energy has a trailing yield of 1.9% on the current stock price of $84.21. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
See our latest analysis for Diamondback Energy
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. Diamondback Energy lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Over the last year, it paid out dividends equivalent to 231% of what it generated in free cash flow, a disturbingly high percentage. It's pretty hard to pay out more than you earn, so we wonder how Diamondback Energy intends to continue funding this dividend, or if it could be forced to cut the payment.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
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. Diamondback Energy 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.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past three years, Diamondback Energy has increased its dividend at approximately 47% a year on average.
Get our latest analysis on Diamondback Energy's balance sheet health here.
The Bottom Line
Should investors buy Diamondback Energy for the upcoming dividend? First, it's not great to see the company paying a dividend despite being loss-making over the last year. Second, the dividend was not well covered by cash flow." It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
Although, if you're still interested in Diamondback Energy and want to know more, you'll find it very useful to know what risks this stock faces. For example - Diamondback Energy has 4 warning signs we think you should be aware of.
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.
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. 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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