Should Oil and Gas Exploration and Production AD (BUL:NGAZ) Be Part Of Your Income Portfolio?

Could Oil and Gas Exploration and Production AD (BUL:NGAZ) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

In this case, Oil and Gas Exploration and Production AD likely looks attractive to dividend investors, given its 6.1% dividend yield and seven-year payment history. It sure looks interesting on these metrics - but there's always more to the story. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

Click the interactive chart for our full dividend analysis

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Although it reported a loss over the past 12 months, Oil and Gas Exploration and Production AD currently pays a dividend. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

Oil and Gas Exploration and Production AD paid out 0.4% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable.

While the above analysis focuses on dividends relative to a company's earnings, we do note Oil and Gas Exploration and Production AD's strong net cash position, which will let it pay larger dividends for a time, should it choose.

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

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the data, we can see that Oil and Gas Exploration and Production AD has been paying a dividend for the past seven years. It's good to see that Oil and Gas Exploration and Production AD has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past seven-year period, the first annual payment was лв1.1 in 2014, compared to лв0.2 last year. The dividend has fallen 79% over that period.

A shrinking dividend over a seven-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 19% 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 the company paying a dividend while being loss-making, although at least the dividend was covered by free cash flow. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. In summary, Oil and Gas Exploration and Production AD has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are a number of better ideas out there.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Oil and Gas Exploration and Production AD has 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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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