Santos Limited (ASX:STO) stock is about to trade ex-dividend in 2 days. 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Thus, you can purchase Santos' shares before the 24th of February in order to receive the dividend, which the company will pay on the 26th of March.

The company's next dividend payment will be US$0.103 per share, and in the last 12 months, the company paid a total of US$0.23 per share. Based on the last year's worth of payments, Santos stock has a trailing yield of around 5.5% on the current share price of AU$6.68. If you buy this business for its dividend, you should have an idea of whether Santos's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for Santos

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Santos paid out more than half (62%) of its earnings last year, which is a regular payout ratio for most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the last year, it paid out dividends equivalent to 221% of what it generated in free cash flow, a disturbingly high percentage. It's pretty hard to pay out more than you earn, so we wonder how Santos intends to continue funding this dividend, or if it could be forced to cut the payment.

While Santos's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Santos's ability to maintain its dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.ASX:STO Historic Dividend February 21st 2025

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see Santos earnings per share are up 3.1% per annum over the last five years. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Story Continues

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Santos's dividend payments per share have declined at 2.8% per year on average over the past 10 years, which is uninspiring. It's unusual to see earnings per share increasing at the same time as dividends per share have been in decline. We'd hope it's because the company is reinvesting heavily in its business, but it could also suggest business is lumpy.

The Bottom Line

From a dividend perspective, should investors buy or avoid Santos? Santos is paying out a reasonable percentage of its income and an uncomfortably high 221% of its cash flow as dividends. At least earnings per share have been growing steadily. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Santos.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Santos. For example - Santos has 1 warning sign we think you should be aware of.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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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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