Readers hoping to buy Epsilon Energy Ltd. (NASDAQ:EPSN) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company’s books to be eligible for a dividend payment. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. This means that investors who purchase Epsilon Energy’s shares on or after the 14th of December will not receive the dividend, which will be paid on the 29th of December.
The company’s upcoming dividend is US$0.063 a share, following on from the last 12 months, when the company distributed a total of US$0.25 per share to shareholders. Calculating the last year’s worth of payments shows that Epsilon Energy has a trailing yield of 4.9% on the current share price of $5.12. If you buy this business for its dividend, you should have an idea of whether Epsilon Energy’s dividend is reliable and sustainable. As a result, readers should always check whether Epsilon Energy has been able to grow its dividends, or if the dividend might be cut.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Fortunately Epsilon Energy’s payout ratio is modest, at just 41% of profit. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Epsilon Energy paid out more free cash flow than it generated – 118%, to be precise – last year, which we think is concerningly high. We’re curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
Epsilon Energy does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.
While Epsilon Energy’s dividends were covered by the company’s reported profits, cash is somewhat more important, so it’s not great to see that the company didn’t generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Epsilon Energy’s ability to maintain its dividend.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. Fortunately for readers, Epsilon Energy’s earnings per share have been growing at 17% a year for the past five years. Earnings have been growing at a decent rate, but we’re concerned dividend payments consumed most of the company’s cash flow over the past year.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Epsilon Energy’s dividend payments are broadly unchanged compared to where they were two years ago.
To Sum It Up
Is Epsilon Energy worth buying for its dividend? We like that Epsilon Energy has been successfully growing its earnings per share at a nice rate and reinvesting most of its profits in the business. However, we note the high cashflow payout ratio with some concern. In summary, it’s hard to get excited about Epsilon Energy from a dividend perspective.
So while Epsilon Energy looks good from a dividend perspective, it’s always worthwhile being up to date with the risks involved in this stock. For example, we’ve found 1 warning sign for Epsilon Energy that we recommend you consider before investing in the business.
Generally, we wouldn’t recommend just buying the first dividend stock you see. Here’s a curated list of interesting stocks that are strong dividend payers.
Valuation is complex, but we’re helping make it simple.
Find out whether Epsilon Energy is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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