It looks like Seplat Petroleum Development Company Plc (LON: SEPL) is set to be ex-dividend within the next 3 days. Typically, the ex-dividend date is one business day prior to the record date which is the date a company determines which shareholders are eligible to receive a dividend. The ex-dividend date is an important date to know, as any purchase of shares made after this date may mean a late settlement which does not appear on the record date. This means that investors who buy the shares of Seplat Petroleum Development as of November 12 will not receive the dividend, which will be paid on December 9.

The company’s next dividend payment will be US $ 0.025 per share, and over the past 12 months the company has paid a total of US $ 0.10 per share. Calculating the value of last year’s payments shows that Seplat Petroleum Development has a 9.4% return on the current price of £ 0.786. Dividends are a major contributor to returns on investment for long-term holders, but only if the dividend continues to be paid. Accordingly, readers should always check whether Seplat Petroleum Development was able to increase its dividends or whether the dividend could be reduced.

See our latest analysis for Seplat Petroleum Development

Dividends are usually paid out of the company’s profits, so if a company pays more than it earned, its dividend is usually at risk of being reduced. Seplat Petroleum Development paid 146% of the profits over the past year, which in our opinion is generally not sustainable, unless there are mitigating characteristics such as unusually high cash flow or a large cash balance. Yet cash flow is still more important than earnings in valuing a dividend, so we need to see if the company has generated enough cash to pay for its distribution. Dividends consumed 62% of the company’s free cash flow last year, which is within a normal range for most dividend-paying organizations.

It’s good to see that if Seplat Petroleum Development’s dividends weren’t covered by earnings, they are at least affordable from a cash standpoint. Yet if the company repeatedly paid out a dividend that was greater than its profits, we would be concerned. Very few companies are able to sustainably pay dividends greater than their declared profits.

Click here to view the company’s payout ratio, as well as analysts’ estimates of its future dividends.

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Have profits and dividends increased?

Companies with declining profits are tricky from a dividend standpoint. If profits fall enough, the company could be forced to cut its dividend. Seplat Petroleum Development’s earnings per share have fallen by around 6.9% per year over the past five years. Ultimately, when earnings per share declines, the size of the pie from which dividends can be paid declines.

Most investors primarily assess a company’s dividend prospects by checking the historical rate of dividend growth. Seplat Petroleum Development has seen its dividend fall by 2.6% per year on average over the past seven years, which is not terrible to see. It’s never nice to see profits and dividends go down, but at least management has reduced the dividend rather than potentially risking the health of the company in an attempt to maintain it.

To summarize

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

With that in mind, if Seplat Petroleum Development’s low dividend characteristics don’t scare you, it is worth being aware of the risks involved in this business. Every business has risks, and we have spotted 4 warning signs for Seplat Petroleum Development (1 of which makes us a little uncomfortable!) to know.

If you are in the dividend-paying stock market, we recommend that you check out our list of the highest dividend-paying stocks with a yield above 2% and a future dividend.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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