Why It Might Not Make Sense To Buy Epsilon Energy Ltd. (NASDAQ:EPSN) For Its Upcoming Dividend
Epsilon Energy Ltd. (NASDAQ:EPSN) is about to trade ex-dividend in the next three days. The ex-dividend date is usually set to be one business day before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. In other words, investors can purchase Epsilon Energy's shares before the 15th of September in order to be eligible for the dividend, which will be paid on the 30th of September.
The company's upcoming dividend is US$0.0625 a share, following on from the last 12 months, when the company distributed a total of US$0.25 per share to shareholders. Looking at the last 12 months of distributions, Epsilon Energy has a trailing yield of approximately 4.0% on its current stock price of US$6.31. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Epsilon Energy can afford its dividend, and if the dividend could grow.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Epsilon Energy reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If Epsilon Energy didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Over the last year it paid out 60% of its free cash flow as dividends, within the usual range for most companies.
See our latest analysis for Epsilon Energy
Click here to see how much of its profit Epsilon Energy paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Epsilon Energy reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. It looks like the Epsilon Energy dividends are largely the same as they were five years ago. If a company's dividend stays flat while earnings are in decline, this is typically a sign that it is paying out a larger percentage of its earnings. This can become unsustainable if earnings fall far enough.
We update our analysis on Epsilon Energy every 24 hours, so you can always get the latest insights on its financial health, here.
Final Takeaway
Is Epsilon Energy an attractive dividend stock, or better left on the shelf? First, it's not great to see the company paying a dividend despite being loss-making over the last year. On the plus side, the dividend was covered by free cash flow." It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
With that in mind though, if the poor dividend characteristics of Epsilon Energy don't faze you, it's worth being mindful of the risks involved with this business. To help with this, we've discovered 3 warning signs for Epsilon Energy (2 can't be ignored!) that you ought to be aware of before buying the shares.
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.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.