Do These 3 Checks Before Buying Hallador Energy Company (NASDAQ:HNRG) For Its Upcoming Dividend

Readers hoping to buy Hallador Energy Company (NASDAQ:HNRG) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Investors can purchase shares before the 30th of January in order to be eligible for this dividend, which will be paid on the 14th of February.

Hallador Energy’s next dividend payment will be US$0.04 per share, and in the last 12 months, the company paid a total of US$0.16 per share. Looking at the last 12 months of distributions, Hallador Energy has a trailing yield of approximately 7.9% on its current stock price of $2.02. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it’s growing.

Check out our latest analysis for Hallador Energy

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. Hallador Energy paid out 196% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out 21% of its free cash flow as dividends last year, which is conservatively low.

It’s disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Hallador Energy fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we’d be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see how much of its profit Hallador Energy paid out over the last 12 months.

NasdaqCM:HNRG Historical Dividend Yield, January 26th 2020
NasdaqCM:HNRG Historical Dividend Yield, January 26th 2020

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Hallador Energy’s earnings have collapsed faster than Wile E Coyote’s schemes to trap the Road Runner; down a tremendous 36% a year over the past five years.

Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. In the last nine years, Hallador Energy has lifted its dividend by approximately 3.2% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Hallador Energy is already paying out a high percentage of its income, so without earnings growth, we’re doubtful of whether this dividend will grow much in the future.

To Sum It Up

Is Hallador Energy an attractive dividend stock, or better left on the shelf? It’s never great to see earnings per share declining, especially when a company is paying out 196% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower – good news from a dividend perspective – which makes us wonder why there is such a mis-match between income and cashflow. It’s not an attractive combination from a dividend perspective, and we’re inclined to pass on this one for the time being.

Curious about whether Hallador Energy has been able to consistently generate growth? Here’s a chart of its historical revenue and earnings growth.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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