Surge Energy (TSE:SGY) Has Affirmed Its Dividend Of CA$0.04

The board of Surge Energy Inc. (TSE:SGY) has announced that it will pay a dividend on the 15th of November, with investors receiving CA$0.04 per share. Based on this payment, the dividend yield will be 5.2%, which is fairly typical for the industry.

View our latest analysis for Surge Energy

Surge Energy Doesn't Earn Enough To Cover Its Payments

Solid dividend yields are great, but they only really help us if the payment is sustainable. Before making this announcement, Surge Energy was easily earning enough to cover the dividend. As a result, a large proportion of what it earned was being reinvested back into the business.

Looking forward, earnings per share is forecast to fall by 89.4% over the next year. If the dividend continues along the path it has been on recently, the payout ratio in 12 months could be 155%, which is definitely a bit high to be sustainable going forward.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. The dividend has gone from an annual total of CA$3.40 in 2013 to the most recent total annual payment of CA$0.48. The dividend has fallen 86% over that period. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.

The Dividend Looks Likely To Grow

Dividends have been going in the wrong direction, so we definitely want to see a different trend in the earnings per share. Surge Energy has impressed us by growing EPS at 32% per year over the past five years. Rapid earnings growth and a low payout ratio suggest this company has been effectively reinvesting in its business. Should that continue, this company could have a bright future.

An additional note is that the company has been raising capital by issuing stock equal to 19% of shares outstanding in the last 12 months. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

We Really Like Surge Energy's Dividend

In summary, it is good to see that the dividend is staying consistent, and we don't think there is any reason to suspect this might change over the medium term. The company is generating plenty of cash, and the earnings also quite easily cover the distributions. We should point out that the earnings are expected to fall over the next 12 months, which won't be a problem if this doesn't become a trend, but could cause some turbulence in the next year. Taking this all into consideration, this looks like it could be a good dividend opportunity.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. To that end, Surge Energy has 4 warning signs (and 1 which is potentially serious) we think you should know about. Is Surge Energy not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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