Why Canadian Natural Resources Limited (TSE: CNQ) should be included in your dividend portfolio

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<p class = "Canvas-Atom Canvas-Text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Is Canadian Natural Resources Limited (TSE: CNQ) a good dividend share? How can we say it? Dividend-paying companies with growing profits can be very worthwhile in the long term. Sometimes investors buy a share for their dividend and lose money because the share price falls more than they made from dividend payments. "Data-reactid =" 27 "> Is Canadian Natural Resources Limited (TSE: CNQ) a good dividend stock?" How can we judge that? Dividend-paying companies with increasing profits can be worthwhile in the long term. However, sometimes investors buy a share for their dividend and lose money because the share price falls more than they earned on dividend payments. "

A high return and a long history of paying dividends are an attractive combination for Canadian Natural Resources. We would guess that many investors bought it for income. In addition, the company returned around 2.1% of its market capitalization to shareholders in the form of share buybacks last year. Some simple analysis can reduce the risk of holding Canadian Natural Resources for its dividend, and we'll focus on the key ones below.

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TSX: CNQ Historic Dividend Yield, January 3, 2020

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Dividends are usually paid out of company earnings. If a company pays more than it earns, the dividend may no longer be sustainable – hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way to check whether a dividend is sustainable. Data shows that 43% of Canadian Natural Resources' profits have been distributed as a dividend in the past 12 months. A medium payout ratio creates a balance between dividend payment and reluctance to invest in the business. In addition, the company can increase the dividend if there are no opportunities for reinvestment.

In addition to comparing dividends to profits, we should check whether the company has generated enough cash to pay its dividend. Canadian Natural Resources paid a conservative 42% of its free cash flow as a dividend last year. It is gratifying to see that the dividend is covered by both profit and cash flow. This usually suggests that the dividend is sustainable as long as profits don't fall excessively.

Is Canadian Natural Resources's balance sheet risky?

Since Canadian Natural Resources has a significant amount of debt, we need to review its balance sheet to determine if the company may have debt risk. A rough way to check this are the following two key figures: a) Net debt divided by EBITDA (earnings before interest, taxes, depreciation and amortization) and b) Net interest coverage. Net debt to EBITDA is a measure of a company's total debt. Net interest coverage measures the ability to make interest payments. In essence, we are checking that a) the company does not have too much debt and b) can afford to pay the interest. With a net debt of 2.22x EBITDA, Canadian Natural Resources' debt burden is normal for most listed companies.

Net interest coverage can be calculated by dividing earnings before interest and taxes (EBIT) by the company's net interest expense. The net interest coverage of 5.59 times their interest expense appears reasonable for Canadian Natural Resources, although we are aware that even high interest coverage does not make a company bulletproof.

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Volatility of the dividend

One of the biggest risks of relying on dividend income is the potential for a company to run into financial difficulties and lower its dividend. Not only your income drops, but also the value of your investment – evil. For the purpose of this article, we are only examining the last decade of Canadian Natural Resources dividend payments. During this period, the dividend was stable, which could mean that the business could have a relatively constant profitability. In the past decade, the first annual payment in 2010 was CA $ 0.21, compared to CA $ 1.50 a year earlier. This corresponds to an average annual growth rate (CAGR) of approximately 22% per year during this period.

Dividends rose fairly quickly, and what's even more impressive is that they haven't seen any notable declines over the period.

Growth potential of the dividend

While dividend payments were relatively reliable, it would also be nice if earnings per share (EPS) increased, as this is essential for maintaining the dividend's purchasing power in the long term. The strong growth in earnings per share (EPS) could encourage our interest in the company despite fluctuating dividends. It is therefore gratifying that Canadian Natural Resources has achieved earnings per share of 10% pa in the past five years. A company that pays less than a quarter of its profit as a dividend and increases its profit by more than 10% annually seems to be just right in the growth phase. We could be interested at the right price.

Conclusion

Dividend investors should always want to know whether a) a company's dividends are affordable, b) whether there is a track record of constant payments, and c) whether the dividend can grow. First, we like that Canadian Natural Resources has low and conservative payout ratios. The growing earnings per share and steady dividend payments are a great combination. After all these considerations, this organization has a lot to offer from a dividend perspective.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "The profit growth is generally a good sign for the Future value of corporate dividend payments: See if the 9 Canadian commodity analysts we track are predicting continued growth with our forecasts free Company analyst estimates report, "data-reactid =" 60 "> Earnings growth is generally a good sign of the future value of the company's dividend payments. See if the 9 Canadian Natural Resources analysts we track are predicting continued growth with our forecasts free Company analyst estimates report.

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<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "If you discover an error that justifies a correction, please contact the editorial team at editorial-team@simplywallst.com, This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the stocks mentioned.

We strive to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Thank you for reading."data-reactid =" 62 ">If you discover an error that justifies a correction, please contact the editorial team at editorial-team@simplywallst.com. This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the stocks mentioned.

We strive to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Thank you for reading.