Sitio Royalties Corp. (NYSE:STR) is reducing its dividend from last year's comparable payment to $0.40 on the 31st of August. However, the dividend yield of 8.1% is still a decent boost to shareholder returns.
Sitio Royalties Is Paying Out More Than It Is Earning
A big dividend yield for a few years doesn't mean much if it can't be sustained. Based on the last payment, the company wasn't making enough to cover what it was paying to shareholders. Without profits and cash flows increasing, it would be difficult for the company to continue paying the dividend at this level.
Earnings per share is forecast to rise exponentially over the next year. If the dividend continues along recent trends, we estimate the payout ratio could reach 166%, which is unsustainable.
Sitio Royalties Doesn't Have A Long Payment History
It is tough to make a judgement on how stable a dividend is when the company hasn't been paying one for very long. This doesn't mean that the company can't pay a good dividend, but just that we want to wait until it can prove itself.
The Dividend Has Limited Growth Potential
Given that the track record hasn't been stellar, we really want to see earnings per share growing over time. Sitio Royalties' earnings per share has fallen 85% over the past year. Such a large drop can indicate that the business has run into some trouble and might end up in the dividend having to be reduced. However, we would never make any decisions based on only a single year of data, especially when assessing long term dividend potential.
We should note that Sitio Royalties has issued stock equal to 87% of shares outstanding. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.
Sitio Royalties' Dividend Doesn't Look Great
Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. The company isn't making enough to be paying as much as it is, and the other factors don't look particularly promising either. Considering all of these factors, we wouldn't rely on this dividend if we wanted to live on the income.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've identified 3 warning signs for Sitio Royalties (2 are concerning!) that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.
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