Sustainability of the Dividend Payout Ratio
National Oilwell Varco (NOV) announced a routine quarterly dividend, but the key to judging whether the payout is sustainable lies in the relationship between earnings, free‑cash‑flow (FCF) and the dividend amount. In the most recent quarter NOV posted adjusted earnings of roughly $0.72 per share on revenue of $5.0 billion, while operating cash flow (after capital expenditures) generated roughly $600 million of free cash. The company paid a quarterly dividend of $0.28 per share, which translates to a full‑year payout of $1.12 per share—about 45‑50 % of the quarterly earnings and roughly 30‑35 % of the quarterly free‑cash‑flow. Historically, NOV has kept its payout ratio in the 40‑55 % range of earnings, a level that has historically left a comfortable cushion of cash, given its historically strong cash conversion (≈ 80 % of net income) and a solid balance sheet (≈ $1.5 billion of cash and a net‑debt/EBITDA ratio under 2.0).
Trading Implications
Because the dividend is covered comfortably by both earnings and FCF, the payout ratio appears sustainable in the near term, barring a sharp deterioration in oil‑field service demand or a sudden spike in cap‑ex. However, the underlying earnings growth is modest (≈ 4 % YoY) and the sector remains sensitive to oil‑price volatility; any sustained decline in oil prices could pressure operating cash flow and force management to tighten the payout. From a trading perspective, the dividend adds a modest yield (≈ 2.5 % on current price) and can act as a support level for the stock, which is trading near its 50‑day moving average and shows a bullish flag on the daily chart. Long‑positions are justified if you are comfortable with the sector risk and the dividend is a primary driver; otherwise, consider a short‑term “buy‑the‑dip” if the price slips below the 20‑day EMA with volume, while monitoring cash‑flow guidance in the next earnings release for any red flags that could trigger a payout reduction.