National-Oilwell Varco, Inc. (NOV): A Lesson on Dividend Safety

Finally, we pay attention to trends in a company’s dividend payout ratio. A rising payout ratio means that a company’s dividend has increased relative to its earnings.

This can happen because of strong dividend growth, falling earnings, or some combination of the two.

If earnings are falling fast, a payout ratio that looked safe last quarter can quickly become dangerous.

In the case of National Oilwell Varco and other stocks, we like to evaluate long-term trends in payout ratios. As seen below, the company’s free cash flow payout ratio increased from 14% in 2013 to 81% in 2015. Its payout ratio also doubled from 2014 to 2015.

Source: Simply Safe Dividends

While a payout ratio of 81% is not ideal, it could also be much worse. However, investors need to remain aware that payout ratios can quickly deteriorate.

Given the cyclical nature of National Oilwell Varco’s business, our Dividend Safety Scores flagged the company’s rising payout ratio and reduced its safety score accordingly.

If business trends continued declining in 2016 (anything can happen in one year in commodity markets), there’s not much stopping the payout ratio from doubling again to an unsustainable level.

Closing Remarks

Dividend investors can improve the safety profile of their portfolio’s income by doing their homework. Simply monitoring a company’s payout ratio is not enough to evaluate the safety of its dividend.

Our Dividend Safety Scores to size up all of the key risk factors impacting a company’s ability to continue paying dividends, and we use our scores to avoid risky income stocks.

Checking a stock’s Dividend Safety Score prior to making an investment decision can help income investors can steer clear of many risky income stocks such as National-Oilwell Varco, Inc. (NYSE:NOV).

By sticking with companies that score well for Dividend Safety, we sleep better at night with the holdings in our Top 20 Dividend Stocks and Conservative Retirees dividend portfolios.

While the market’s direction can always surprise us, we expect our portfolios’ dividends to continue being paid in almost any environment and continue growing over the long run.

Disclosure: None