Some investors rely on dividends to grow their wealth, and if you're one of those dividend experts, you might be interested to know InPlay Oil Corp. (TSE:IPO) is about to go ex-dividend in just 4 days. The ex-dividend date is one day before the record date, which is the day on which shareholders must be registered on the company's books in order to receive a dividend. The ex-dividend date is important because the settlement process takes two full business days. So if you miss this deadline, you will not be listed on the company's books as of the effective date. This means you must purchase InPlay Oil shares before December 14th to receive the dividend, which will be paid on December 29th.
The company's next dividend payment will be CAD 0.015 per share, and in the last 12 months the company paid a total of CAD 0.18 per share. Based on the last year's worth of payments, InPlay Oil has a trailing yield of 7.8% based on the current share price of C$2.3. We love when companies pay a dividend, but we also need to be sure that laying the golden eggs doesn't kill our golden goose! So we need to check whether the dividend payments are covered and whether earnings are increasing.
Check out our latest analysis for InPlay Oil
Dividends are usually paid from company earnings. So if a company pays out more than it earned, it's usually at a higher risk of having its dividend cut. That's why it's good that InPlay Oil pays out a modest 35% of its earnings. However, cash flows are even more important than profits when calculating a dividend. Therefore, we need to check whether the company generated enough cash to pay its distribution. The company paid out an unsustainably high 265% of its free cash flow as dividends over the last 12 months, which is concerning. Unless there is something about the business that we don't understand, this could point to a risk that the dividend may have to be cut in the future.
While InPlay Oil's dividends were covered by the company's reported profits, cash is slightly more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and if InPlay Oil were to repeatedly pay dividends that weren't adequately covered by cash flow, we would consider this a warning sign.
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Click here to see the company's payout ratio and analyst estimates of its future dividends.
historical dividend
Have profits and dividends increased?
Stocks in companies that generate sustainable earnings growth often have the best dividend prospects, because it is easier to raise the dividend when earnings are rising. If profits fall far enough, the company could be forced to cut its dividend. It's encouraging to see that InPlay Oil has grown its profits quickly over the last five years, increasing by 45% per year. Profits have been rising quickly, but we worry that dividend payments have eaten up most of the company's cash flow over the past year.
Given that InPlay Oil has only been paying a dividend for a year, there isn't much history to draw insight from.
Last snack
From a dividend perspective, should investors buy or avoid InPlay Oil? We like that InPlay Oil has successfully grown its earnings per share at a good pace and reinvested the majority of its profits back into the business. However, we note the high cash flow payout ratio with some concern. It might be worth investigating whether the company is reinvesting in growth projects that could grow earnings and dividends in the future, but at the moment we're not overly optimistic about its dividend prospects.
With that in mind, even though InPlay Oil has an attractive dividend, it's worth knowing the risks associated with this stock. For example, we noted 5 warning signs for InPlay Oil (1 cannot be ignored!) that deserve your attention before investing in the stocks.
A common investing mistake is buying the first interesting stock you see. Here you can find a complete list of high-yield dividend stocks.
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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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