Sitio Royalties Corp. (NYSE:STR) is about to trade ex-dividend in the next three 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Thus, you can purchase Sitio Royalties' shares before the 17th of August in order to receive the dividend, which the company will pay on the 31st of August.
The company's upcoming dividend is US$0.40 a share, following on from the last 12 months, when the company distributed a total of US$2.03 per share to shareholders. Calculating the last year's worth of payments shows that Sitio Royalties has a trailing yield of 8.1% on the current share price of $25.08. 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.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. An unusually high payout ratio of 354% of its profit suggests something is happening other than the usual distribution of profits to shareholders. A useful secondary check can be to evaluate whether Sitio Royalties generated enough free cash flow to afford its dividend. It paid out 95% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.
Cash is slightly more important than profit from a dividend perspective, but given Sitio Royalties's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Earnings per share are basically flat over the past 12 months. The best dividend stocks all grow their earnings per share over the long run, but it is hard to draw strong conclusions from any one year period.
Unfortunately Sitio Royalties has only been paying a dividend for a year or so, so there's not much of a history to draw insight from.
Has Sitio Royalties got what it takes to maintain its dividend payments? Earnings per share are effectively flat, plus Sitio Royalties's dividend is not well covered by either earnings or cash flow, which is not great. Bottom line: Sitio Royalties has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
With that in mind though, if the poor dividend characteristics of Sitio Royalties don't faze you, it's worth being mindful of the risks involved with this business. For example, we've found 3 warning signs for Sitio Royalties (2 are a bit unpleasant!) that deserve your attention before investing in the shares.
Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.
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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.