TransGlobe Energy Corporation (NASDAQ:TGA) is about to trade ex-dividend in the next 4 days. You will need to purchase shares before the 29th of August to receive the dividend, which will be paid on the 13th of September.
TransGlobe Energy’s upcoming dividend is US$0.035 a share, following on from the last 12 months, when the company distributed a total of US$0.07 per share to shareholders. Last year’s total dividend payments show that TransGlobe Energy has a trailing yield of 5.2% on the current share price of $1.35. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That’s why we should always check whether the dividend payments appear sustainable, and if the company is 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. That’s why it’s good to see TransGlobe Energy paying out a modest 26% of its earnings. A useful secondary check can be to evaluate whether TransGlobe Energy generated enough free cash flow to afford its dividend. It distributed 26% of its free cash flow as dividends, a comfortable payout level for most companies.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we’re concerned to see TransGlobe Energy’s earnings per share have dropped 19% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. TransGlobe Energy has seen its dividend decline 19% per annum on average over the past 5 years, which is not great to see. While it’s not great that earnings and dividends per share have fallen in recent years, we’re encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.
The Bottom Line
From a dividend perspective, should investors buy or avoid TransGlobe Energy? TransGlobe Energy has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. Overall we’re not hugely bearish on the stock, but there are likely better dividend investments out there.
Wondering what the future holds for TransGlobe Energy? See what the two analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.