Investors In Oil and Gas Exploration and Production AD (BUL:4O1) Should Consider This, First

Today we'll take a closer look at Oil and Gas Exploration and Production AD (BUL:4O1) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

In this case, Oil and Gas Exploration and Production AD likely looks attractive to dividend investors, given its 5.9% dividend yield and six-year payment history. It sure looks interesting on these metrics - but there's always more to the story. There are a few simple ways to reduce the risks of buying Oil and Gas Exploration and Production AD for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Oil and Gas Exploration and Production AD!

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Oil and Gas Exploration and Production AD paid out 393% of its profit as dividends, over the trailing twelve month period. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Oil and Gas Exploration and Production AD's cash payout ratio last year was 21%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout. It's good to see that while Oil and Gas Exploration and Production AD'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.

With a strong net cash balance, Oil and Gas Exploration and Production AD investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on Oil and Gas Exploration and Production AD's financial position here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Oil and Gas Exploration and Production AD has been paying a dividend for the past six years. Although it has been paying a dividend for several years now, the dividend has been cut at least once, and we're cautious about the consistency of its dividend across a full economic cycle. During the past six-year period, the first annual payment was лв1.1 in 2014, compared to лв0.2 last year. This works out to a decline of approximately 79% over that time.

A shrinking dividend over a six-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

Dividend Growth Potential

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Oil and Gas Exploration and Production AD's earnings per share have shrunk at 40% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Oil and Gas Exploration and Production AD's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Oil and Gas Exploration and Production AD's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're a bit uncomfortable with its high payout ratio, although at least the dividend was covered by free cash flow. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. Overall, Oil and Gas Exploration and Production AD falls short in several key areas here. Unless the investor has strong grounds for an alternative conclusion, we find it hard to get interested in a dividend stock with these characteristics.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Just as an example, we've come accross 5 warning signs for Oil and Gas Exploration and Production AD you should be aware of, and 1 of them is a bit unpleasant.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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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. 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.
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