Why It Might Not Make Sense To Buy Expand Energy Corporation (NASDAQ:EXE) For Its Upcoming Dividend

November 10

Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Expand Energy Corporation (NASDAQ:EXE) 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. 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 Expand Energy’s shares before the 14th of November to receive the dividend, which will be paid on the 4th of December.

The company’s upcoming dividend is US$0.575 a share, following on from the last 12 months, when the company distributed a total of US$2.44 per share to shareholders. Last year’s total dividend payments show that Expand Energy has a trailing yield of 2.6% on the current share price of US$92.49. If you buy this business for its dividend, you should have an idea of whether Expand Energy’s dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it’s growing.

See our latest analysis for Expand Energy

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Expand Energy paid out 127% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. 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. Over the past year it paid out 130% of its free cash flow as dividends, which is uncomfortably high. We’re curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Cash is slightly more important than profit from a dividend perspective, but given Expand Energy’s payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

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

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Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Expand Energy’s earnings have collapsed faster than Wile E Coyote’s schemes to trap the Road Runner; down a tremendous 48% a year over the past five years.

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Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. In the last three years, Expand Energy has lifted its dividend by approximately 21% a year on average. That’s intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Expand Energy is already paying out 127% of its profits, and with shrinking earnings we think it’s unlikely that this dividend will grow quickly in the future.

Should investors buy Expand Energy for the upcoming dividend? Not only are earnings per share declining, but Expand Energy is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a clearly suboptimal combination that usually suggests the dividend is at risk of being cut. If not now, then perhaps in the future. It’s not that we think Expand Energy is a bad company, but these characteristics don’t generally lead to outstanding dividend performance.

So if you’re still interested in Expand Energy despite it’s poor dividend qualities, you should be well informed on some of the risks facing this stock. To that end, you should learn about the 4 warning signs we’ve spotted with Expand Energy (including 2 which are significant).

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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