Pharos Energy (LON:PHAR) Is Paying Out A Dividend Of $0.0077

The board of Pharos Energy plc (LON:PHAR) has announced that it will pay a dividend of $0.0077 per share on the 19th of July. The dividend yield is 4.6% based on this payment, which is a little bit low compared to the other companies in the industry.

View our latest analysis for Pharos Energy

Pharos Energy's Dividend Is Well Covered By Earnings

The dividend yield is a little bit low, but sustainability of the payments is also an important part of evaluating an income stock. Pharos Energy is not generating a profit, but its free cash flows easily cover the dividend, leaving plenty for reinvestment in the business. In general, cash flows are more important than the more traditional measures of profit so we feel pretty comfortable with the dividend at this level.

Looking forward, earnings per share is forecast to rise by 118.1% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 43%, which is in the range that makes us comfortable with the sustainability of the dividend.

Pharos Energy's Dividend Has Lacked Consistency

Looking back, Pharos Energy's dividend hasn't been particularly consistent. This makes us cautious about the consistency of the dividend over a full economic cycle. Since 2015, the annual payment back then was $0.139, compared to the most recent full-year payment of $0.0137. This works out to a decline of approximately 90% over that time. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.

The Company Could Face Some Challenges Growing The Dividend

Dividends have been going in the wrong direction, so we definitely want to see a different trend in the earnings per share. Pharos Energy has seen EPS rising for the last five years, at 14% 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 good to see that the dividend hasn't been cut, we are a bit cautious about Pharos Energy's payments, as there could be some issues with sustaining them into the future. 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.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 1 warning sign for Pharos Energy that investors need to be conscious of moving forward. Is Pharos Energy not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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