Readers hoping to buy Equitrans Midstream Corporation (NYSE:ETRN) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase Equitrans Midstream's shares before the 2nd of February to receive the dividend, which will be paid on the 14th of February.
The company's upcoming dividend is US$0.15 a share, following on from the last 12 months, when the company distributed a total of US$0.60 per share to shareholders. Based on the last year's worth of payments, Equitrans Midstream has a trailing yield of 7.4% on the current stock price of $8.07. 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.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Equitrans Midstream paid out 96% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. 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. It distributed 38% of its free cash flow as dividends, a comfortable payout level for most companies.
It's good to see that while Equitrans Midstream's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Equitrans Midstream, with earnings per share up 5.2% on average over the last five years.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Equitrans Midstream has seen its dividend decline 28% per annum on average over the past three years, which is not great to see. Equitrans Midstream is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
The Bottom Line
Has Equitrans Midstream got what it takes to maintain its dividend payments? Equitrans Midstream has been steadily growing its earnings per share, and it is paying out just 38% of its cash flow but an uncomfortably high 96% of its income. All things considered, we are not particularly enthused about Equitrans Midstream from a dividend perspective.
If you're not too concerned about Equitrans Midstream's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. For example, Equitrans Midstream has 3 warning signs (and 1 which is a bit concerning) we think you should know about.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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