Home Optimal energy Don’t rush to buy Rattler Midstream LP (NASDAQ:RTLR) just because it goes...

Don’t rush to buy Rattler Midstream LP (NASDAQ:RTLR) just because it goes ex-dividend

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Some investors rely on dividends to grow their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Rattler Midstream LP (NASDAQ:RTLR) is set to go ex-dividend in just four days. The ex-dividend date is usually one business day before the record date which is the latest date by which you must be present on the books of the company as a shareholder in order to receive the dividend. The ex-dividend date is important because each time a stock is bought or sold, the transaction takes at least two business days to settle. This means you’ll need to buy Rattler Midstream shares by May 12 to receive the dividend, which will be paid on May 20.

The company’s next dividend payment will be $0.30 per share, and over the past 12 months the company has paid a total of $1.00 per share. Based on last year’s payouts, Rattler Midstream stock has a yield of about 7.3% on the current share price of $13.61. Dividends are an important source of income for many shareholders, but the health of the company is essential to sustaining those dividends. We therefore need to consider whether Rattler Midstream can afford its dividend and whether the dividend could increase.

Check out our latest analysis for Rattler Midstream

Dividends are usually paid out of company profits, so if a company pays out more than it has earned, its dividend is usually at risk of being reduced. Its dividend payout ratio is 86% of earnings, meaning the company pays out the majority of its earnings. The relatively limited reinvestment of earnings could slow the rate of future earnings growth. We would be concerned if earnings started to decline. That said, even very profitable companies can sometimes not generate enough cash to pay the dividend, so we should always check if the dividend is covered by cash flow. Over the past year, it has paid dividends equivalent to 315% of what it generated in free cash flow, a worrying percentage. It’s pretty hard to pay more than you earn, so we wonder how Rattler Midstream intends to continue funding this dividend, or if it might be forced to reduce the payout.

While Rattler Midstream’s dividends were covered by the company’s reported earnings, cash is a bit more important, so it’s not nice to see the company didn’t generate enough cash to pay its dividend. If this were to happen again, it would pose a risk to Rattler Midstream’s ability to sustain its dividend.

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

NasdaqGS: RTLR Historic Dividend May 7, 2022

Have earnings and dividends increased?

When earnings decline, dividend companies become much more difficult to analyze and to own safely. If business goes into a recession and the dividend is cut, the company could see its value drop precipitously. Earnings per share at Rattler Midstream have fallen about 47% annually over the previous five years.

Many investors will gauge a company’s dividend yield by evaluating how much dividend payouts have changed over time. It looks like Rattler Midstream’s dividends are largely the same as three years ago. If a company’s dividend remains stable while profits are falling, it is usually a sign that it is paying out a higher percentage of its profits. This can become unsustainable if revenues drop enough.

Last takeaway

Should investors buy Rattler Midstream for the upcoming dividend? Rattler Midstream had an average payout ratio, but its free cash flow was lower and earnings per share declined. Conclusion: Rattler Midstream has some unfortunate characteristics that we believe could lead to sub-optimal results for dividend investors.

That said, if you’re considering this stock without worrying too much about the dividend, you should still be aware of the risks associated with Rattler Midstream. To help you, we found 2 warning signs for Rattler Midstream which you should be aware of before investing in their stocks.

A common investment mistake is to buy the first good stock you see. Here you can find a complete list of high yielding dividend stocks.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.