Secure Energy Services Inc. (TSE:SES) is about to trade ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 30th of January will not receive the dividend, which will be paid on the 18th of February.
Secure Energy Services’s next dividend payment will be CA$0.022 per share. Last year, in total, the company distributed CA$0.27 to shareholders. Based on the last year’s worth of payments, Secure Energy Services stock has a trailing yield of around 5.9% on the current share price of CA$4.61. 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! So we need to check whether the dividend payments are covered, and if earnings are growing.
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. Secure Energy Services paid out a disturbingly high 335% of its profit as dividends last year, which makes us concerned there’s something we don’t fully understand in the business. A useful secondary check can be to evaluate whether Secure Energy Services generated enough free cash flow to afford its dividend. It paid out more than half (54%) of its free cash flow in the past year, which is within an average range for most companies.
It’s good to see that while Secure Energy Services’s dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we’d be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.
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. Secure Energy Services’s earnings per share have fallen at approximately 26% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Secure Energy Services has delivered an average of 8.8% per year annual increase in its dividend, based on the past seven years of dividend payments. 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. Secure Energy Services 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.
The Bottom Line
Has Secure Energy Services got what it takes to maintain its dividend payments? It’s never fun to see a company’s earnings per share in retreat. What’s more, Secure Energy Services is paying out a majority of its earnings and over half its free cash flow. It’s hard to say if the business has the financial resources and time to turn things around without cutting the dividend. Bottom line: Secure Energy Services has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
Curious what other investors think of Secure Energy Services? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.
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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