Hess Midstream LP (NYSE: HESM) is set to trade ex-dividend within the next three days. The ex-dividend date is generally set at one working day before the registration date which is the deadline by which you must be present in the books of the company as a shareholder to receive the dividend. The ex-dividend date is important because any share transaction must have been settled before the registration date to be eligible for a dividend. This means that investors who buy Hess Midstream shares from November 3 will not receive the dividend, which will be paid on November 12.
The company’s next dividend payment will be US $ 0.51 per share. Last year, in total, the company distributed US $ 2.04 to shareholders. Calculating the value of last year’s payouts shows that Hess Midstream has a sliding 8.1% return on the current share price of $ 25.17. We love to see companies pay a dividend, but it’s also important to make sure that laying the golden eggs is not going to kill our goose that lays the golden eggs! So we need to determine if Hess Midstream can afford its dividend and if the dividend could increase.
Dividends are usually paid out of company profits. If a company pays more dividends than it made a profit, then the dividend could be unsustainable. Hess Midstream last year distributed 116% of its profits in the form of dividends to shareholders. Without more sustainable payment behavior, the dividend seems precarious. A useful secondary check may be to assess whether Hess Midstream has generated enough free cash flow to pay its dividend. The good news is that she has only paid out 6.2% of her free cash flow in the past year.
It is disappointing that the dividend was not covered by earnings, but cash is more important from a dividend sustainability perspective, and Hess Midstream has fortunately generated enough cash to fund its dividend. If executives were to continue paying more dividends than the company declared profits, we would take this as a warning sign. Extraordinarily few companies are able to persistently pay out a dividend in excess of their profits.
Historic NYSE dividend: HESM October 30, 2021
Have profits and dividends increased?
When profits fall, dividend companies become much more difficult to analyze and safely own. If profits fall and the company is forced to cut its dividend, investors could see the value of their investment go up in smoke. Hess Midstream’s earnings per share have fallen about 43% per year over the past five years.
Most investors will primarily assess a company’s dividend prospects by checking the historical rate of dividend growth. Hess Midstream has generated an average annual increase of 14% per year in its dividend, based on dividend payments over the past four years. The only way to pay higher dividends when profits go down is to pay a higher percentage of profits, spend money on the balance sheet, or borrow money. Hess Midstream already pays out a high percentage of its earnings, so without earnings growth we doubt that dividend will grow much in the future.
Does Hess Midstream have what it takes to maintain its dividend payments? It’s never great to see earnings per share drop, especially when a company pays out 116% of its profits as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower – good news from a dividend perspective – which makes us wonder why there is such a mismatch between income and cash flow. Overall, this doesn’t seem like the most suitable dividend-paying stock for a long-term buy and hold investor.
So, if you are still interested in Hess Midstream despite its poor dividend qualities, you should be well informed about some of the risks facing this stock. Our analysis shows 2 warning signs for Hess Midstream which we strongly recommend that you consult before investing in the company.
However, we don’t recommend simply buying the first dividend stock you see. here is a list of interesting 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 material. Simply Wall St has no position in any of the stocks mentioned.
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