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Here’s Why We’re Wary Of Buying Seplat Petroleum Development’s (LON:SEPL) For Its Upcoming Dividend.

It looks like Seplat Petroleum Development Company Plc (LON:SEPL) is about to go ex-dividend in the next 3 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn’t show on the record date. This means that investors who purchase Seplat Petroleum Development’s shares on or after the 12th of November will not receive the dividend, which will be paid on the 9th of December.

The company’s next dividend payment will be US$0.025 per share, and in the last 12 months, the company paid a total of US$0.10 per share. Calculating the last year’s worth of payments shows that Seplat Petroleum Development has a trailing yield of 9.4% on the current share price of £0.786. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Seplat Petroleum Development has been able to grow its dividends, or if the dividend might be cut.

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. Seplat Petroleum Development paid out 146% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Dividends consumed 62% of the company’s free cash flow last year, which is within a normal range for most dividend-paying organisations.

It’s good to see that while Seplat Petroleum Development’s dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we’d be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Seplat Petroleum Development’s earnings per share have fallen at approximately 6.9% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Seplat Petroleum Development has seen its dividend decline 2.6% per annum on average over the past seven years, which is not great to see. It’s never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company’s health in an attempt to maintain it.

To Sum It Up

Is Seplat Petroleum Development an attractive dividend stock, or better left on the shelf? Earnings per share have been in decline, which is not encouraging. Worse, Seplat Petroleum Development’s paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it’s not a good combination. It’s not that we think Seplat Petroleum Development is a bad company, but these characteristics don’t generally lead to outstanding dividend performance.

With that in mind though, if the poor dividend characteristics of Seplat Petroleum Development don’t faze you, it’s worth being mindful of the risks involved with this business. Every company has risks, and we’ve spotted 4 warning signs for Seplat Petroleum Development (of which 1 makes us a bit uncomfortable!) you should know about.

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