ONEOK (OKE), an S&P 500 component involved in the transportation and storage of natural gas, has gone the way of the energy sector in the past 52 weeks. The stock, currently within 5% of its 52-week low, is almost 50% off its 52-week high. Despite the depressed energy market and low share price, management recently raised the dividend, creating a yield that is approaching 8.5%.
When evaluating the dividend sustainability of high-yielding companies, investors should look at the payout ratio, the company's ability to pay dividends from free cash flow, and the return on equity needed to support the dividend. In the case of ONEOK, free cash flow (operating cash flow less capital expenditures) has historically been negative. Also, the payouts have exceeded earnings per share for seven consecutive quarters. Yet the company just increased the dividend, so there must be a different methodology to the company's payout policy.
ONEOK is a limited partnership, which has a payout policy different than traditional dividend bellwethers like Coca-Cola (KO) and AT&T (T). These companies tend to finance capital expenditures and pay out a larger portion of cash flow as dividends. ONEOK has created an internal calculation based on recurring cash flows to measure its capability to cover the dividend. (AT&T is part of TheStreet's Dividend Stock Advisor portfolio.)
This is a good illustration of how the company structures its payout policy. As long as the dividend coverage ratio remains above 1, the company will have the recurring cash flow to pay shareholders. While a one-quarter snapshot is nice, a time series of ONEOK's cash flow availability and its dividend coverage ratio will give a better indication of the company's ability to pay out future dividends.
The third quarter's dividend was not only sustainable, but it was the best dividend coverage ratio since the first quarter of 2014. ONEOK stock has clearly been the victim of uncertainty in the energy (specifically natural gas) markets. In addition to the energy markets, questions remain about partnerships and their ability to fund themselves through financing activities. Despite the uncertainty, ONEOK remains more poised to pay the dividend than a year ago, yet the stock is 50% cheaper.
Charts in this article are sourced from an internally managed spreadsheet with a full dashboard published on the ONEOK page at the StockArray website.