Some investors rely on dividends to grow their wealth. If you are one of these dividend sleuths, you might be interested to know that Oil and Gas Company Limited (NSE:ONGC) will trade ex-dividend in just four days. The ex-dividend date is a business day before a company’s record date, when the company determines which shareholders are entitled to a dividend. The ex-dividend date is significant because trading takes at least two business days each time a stock is bought or sold. Accordingly, oil and natural gas investors who buy the stock on or after August 23 will not receive a dividend, which is paid on September 29.

The company’s upcoming dividend is ₹2.50 per share, after the company paid a total of ₹12.25 per share to shareholders over the last 12 months. Based on last year’s payments, the Oil and Natural Gas stock is yielding around 3.7% on the current share price of ₹329.60. If you are buying this company for its dividend, you should have an idea of ​​whether Oil and Natural Gas’s dividend is reliable and sustainable. We need to see if the dividend is covered by earnings and if it is growing.

Check out our latest analysis for Oil and Natural Gas

Dividends are usually paid out of company profits. If a company pays more in dividends than it earned in profits, the dividend cannot be sustainable. That’s why it’s good that oil and natural gas only pay out a modest 31% of their profits. However, when assessing dividend sustainability, cash flow is usually more important than profits, so we should always check whether the company has earned enough money to afford the dividend. Fortunately, dividend payments only accounted for 27% of the free cash flow generated, which is a comfortable payout ratio.

It’s encouraging to see that the dividend is covered by both profits and cash flow. This generally suggests that the dividend is sustainable as long as earnings don’t fall precipitously.

Click here to see the company’s payout ratio as well as analyst estimates of its future dividends.

Have earnings and dividends increased?

Stocks of companies that generate sustainable earnings growth often have the best dividend prospects because it’s easier to increase the dividend when earnings are growing. If the business hits a crisis and the dividend is cut, the value of the company could decline rapidly. That’s why it’s a relief to see that earnings per share in the oil and natural gas sector have grown 8.2% annually over the past five years. Management has reinvested more than half of the company’s profits back into the business, and the company has been able to use this retained capital to grow its earnings. Companies that reinvest heavily in themselves tend to get stronger over time, which can bring attractive benefits such as higher earnings and dividends.

Many investors judge a company’s dividend performance by how dividend payments have changed over time. Over the past decade, the oil and natural gas sector has increased its dividend by an average of about 6.8% per year. It is encouraging to see the company increasing its dividends while earnings are growing, suggesting at least some interest on the part of the company in rewarding its shareholders.

Last Takeaway

Is Oil and Natural Gas an attractive dividend stock, or should it be left on the shelf? Earnings per share growth has been rising somewhat, and Oil and Natural Gas is paying out less than half of its earnings and cash flow as dividends. That’s interesting for a couple of reasons, because it suggests that management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. It might be nice if earnings grew faster, but Oil and Natural Gas is conservative with its dividend payouts and could still perform reasonably well over the long term. It’s a promising combination that should make this company worthy of a closer look.

With this in mind, you should research the risks associated with oil and natural gas. For example, we found out 1 warning sign for oil and natural gas that you should consider before investing in the company.

If you are looking for strong dividend payers, we recommend Check out our selection of the highest dividend stocks.

Do you have feedback on this article? Are you concerned about the content? Contact us directly from us. Alternatively, send an email to editorial-team (at) simplywallst.com.

This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not 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 analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.