Dividend paying stocks like Bonavista Energy Corporation (TSE:BNP) tend to be popular with investors, and for good reason – some research shows that a significant amount of all stock market returns come from reinvested dividends. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
A high yield and a long history of paying dividends is an appealing combination for Bonavista Energy. It’s likely that plenty of investors have purchased it for the income. 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.Explore this interactive chart for our latest analysis on Bonavista Energy!
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 88% of Bonavista Energy’s profits were paid out as dividends in the last 12 months. It’s paying out most of its earnings, which limits the amount that can be reinvested in the business. This may indicate limited need for further capital within the business, or highlight a commitment to paying a dividend.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Bonavista Energy’s cash payout ratio last year was 11%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout.
Is Bonavista Energy’s Balance Sheet Risky?As Bonavista Energy has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks.
A quick way to check a company’s financial situation uses these two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA measures a company’s total debt load relative to its earnings (lower = less debt), while net interest cover measures the company’s ability to pay the interest on its debt (higher = greater ability to pay interest costs). With net debt of more than twice its EBITDA, Bonavista Energy has a noticeable amount of debt, although if business stays steady, this may not be overly concerning.
We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company’s net interest expense. With EBIT of 2.48 times its interest expense, Bonavista Energy’s interest cover is starting to look a bit thin.
Consider getting our latest analysis on Bonavista Energy’s financial position here.
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well – nasty. For the purpose of this article, we only scrutinise the last decade of Bonavista Energy’s dividend payments. Its dividend payments have fallen by 20% or more on at least one occasion over the past ten years. During the past ten-year period, the first annual payment was CA$1.92 in 2009, compared to CA$0.04 last year. Dividend payments have fallen sharply, down 98% over that time.
Dividend Growth Potential
With a relatively unstable dividend, and a poor history of shrinking dividends, it’s even more important to see if EPS are growing. In the last five years, Bonavista Energy’s earnings per share have shrunk at approximately -29% per annum. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. First, we think Bonavista Energy has an acceptable payout ratio and its dividend is well covered by cashflow. Earnings per share are down, and Bonavista Energy’s dividend has been cut at least once in the past, which is disappointing. Ultimately, Bonavista Energy comes up short on our dividend analysis. It’s not that we think it is a bad company – just that there are likely more appealing dividend prospects out there on this analysis.
Without at least some growth in earnings per share over time, the dividend will eventually come under pressure either from costs or inflation. See if the 4 analysts are forecasting a turnaround in our free collection of analyst estimates here.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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.