Would TransGlobe Energy Corporation (NASDAQ:TGA) Be Valuable To Income Investors?

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Could TransGlobe Energy Corporation (NASDAQ:TGA) be an attractive dividend share to own for the long haul? Investors are often drawn to a company for its dividend. 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.

With a five-year payment history and a 3.7% yield, many investors probably find TransGlobe Energy intriguing. It sure looks interesting on these metrics – but there’s always more to the story . Some simple analysis can offer a lot of insights when buying a company for its dividend, and we’ll go through this below.

Explore this interactive chart for our latest analysis on TransGlobe Energy!
NasdaqGS:TGA Historical Dividend Yield, May 7th 2019
NasdaqGS:TGA Historical Dividend Yield, May 7th 2019

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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. Looking at the data, we can see that 32% of TransGlobe Energy’s profits were paid out as dividends in the last 12 months. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Plus, there is room to increase the payout ratio over time.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. TransGlobe Energy’s cash payout ratio last year was 8.9%, which is quite low and suggests that the dividend was thoroughly covered by cash flow.

Remember, you can always get a snapshot of TransGlobe Energy’s latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. TransGlobe Energy has been paying a dividend for the past five years. During the past five-year period, the first annual payment was US$0.20 in 2014, compared to US$0.07 last year. This works out to a decline of approximately 65% over that time.

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. Over the past five years, it looks as though TransGlobe Energy’s EPS have declined at around 23% a year. 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.

Conclusion

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 like that the company’s dividend payments appear well covered, although the retained capital also needs to be effectively reinvested. Earnings per share are down, and TransGlobe Energy’s dividend has been cut at least once in the past, which is disappointing. In sum, we find it hard to get excited about TransGlobe Energy from a dividend perspective. It’s not that we think it’s a bad business; just that there are other companies that perform better on these criteria.

Are management backing themselves to deliver performance? Check their shareholdings in TransGlobe Energy in our latest insider ownership analysis.

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 editorial-team@simplywallst.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.