Is today’s Santos share price a buy for its dividend?

The Santos Ltd (ASX: STO) share price goes ex-dividend tomorrow. This when shares start selling without the value of its dividend payment. But before you rush out to buy at today’s Santos share price, let’s look a little closer at what the the natural gas producer’s dividend offers.

What’s the dividend yield on today’s Santos share price?

Santos announced a disappointing half year result last week on the back of tumbling oil prices. The interim dividend was similarly disappointing, slashed by 65% on the same period last year to just US 2.1 cents per share (cps).

This means that Santos shares currently yield around 1.8% at the current exchange rate, fully franked. Although I wouldn’t be lining up for a 1.8% dividend yield, there are some positive signs for the Santos dividend going forward.

Are good things coming for the Santos dividend?

As the major global economies start to spool up again following their COVID-19 forced holding patterns, it is fair to assume that demand for energy, and energy prices, will continue to recover. The price of brent crude oil has been steadily ticking upwards over the last few months and currently sits around US$44 per barrel.

In addition, guidance provided by Santos has the company targeting record production for the full 2020 year of up to 88 million barrels of oil equivalent (mmboe). Year on year, this would be production growth of up to 16.5%.

Because Santos offers a ‘sustainable’ dividend policy which aims to pay out between 10% and 30% of free cash flow, if these factors can drive higher sales revenue going forward, investors may be in for a jump in the dividend pay-out.

A history of poor dividend returns

Still, 10% to 30% of free cash flow seems to me like poor recompense for investors who have helped to fund billions of dollars in risky capital expenditure. In fact, since 2016, Santos has paid out just US$459 million in dividends and has written down its assets by a staggering US$3.4 billion. In this light, Santos looks like little more than a fiery furnace of capital destruction.

Commodity producers are often prone to cyclical earnings fluctuations which can make dividends unpredictable and Santos is no exception. There may be good things coming for the company, but I won’t be rushing to add Santos to my dividend portfolio today.

Fortunately, there are several other big companies going ex-dividend on 25 August to consider, including:

• Domino’s Pizza Enterprises Ltd. (ASX: DMP)
• InvoCare Limited (ASX: IVC)
• Netwealth Group Ltd (ASX: NWL)

More reading

• 5 things to watch on the ASX 200 on Monday
• These beaten down ASX energy shares could mirror the tech share price boom
• 5 things to watch on the ASX 200 on Friday
• Why CSL, Iress, Santos, & Webjet shares are dropping lower
• Santos share price slumps as interim dividend slashed

Regan Pearson has no position in any of the stocks mentioned.

You can follow him on Twitter @Regan_Invests. 

The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Netwealth. The Motley Fool Australia has recommended Domino’s Pizza Enterprises Limited and InvoCare Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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