Vermilion Energy's (TSE:VET) Shareholders Will Receive A Bigger Dividend Than Last Year

Vermilion Energy Inc. (TSE:VET) has announced that it will be increasing its dividend from last year's comparable payment on the 15th of April to CA$0.13. This makes the dividend yield about the same as the industry average at 4.9%.

View our latest analysis for Vermilion Energy

Vermilion Energy Might Find It Hard To Continue The Dividend

We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. Even though Vermilion Energy isn't generating a profit, it is generating healthy free cash flows that easily cover the dividend. We generally think that cash flow is more important than accounting measures of profit, so we are fairly comfortable with the dividend at this level.

EPS is set to fall quite dramatically over the next 12 months. This means the company will be unprofitable, and with cash flows falling so quickly the cash payout ratio could rise, putting the dividend under pressure.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2015, the dividend has gone from CA$2.58 total annually to CA$0.52. This works out to a decline of approximately 80% over that time. A company that decreases its dividend over time generally isn't what we are looking for.

The Company Could Face Some Challenges Growing The Dividend

Given that the track record hasn't been stellar, we really want to see earnings per share growing over time. Vermilion Energy has seen EPS rising for the last five years, at 17% per annum. Even though the company isn't making a profit, strong earnings growth could turn that around in the near future. If the company can become profitable soon, continuing on this trajectory would bode well for the future of the dividend.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Vermilion Energy's payments are rock solid. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would probably look elsewhere for an income investment.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come across 2 warning signs for Vermilion Energy you should be aware of, and 1 of them is potentially serious. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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