Four Days Left Until VAALCO Energy, Inc. (NYSE:EGY) Trades Ex-Dividend

VAALCO Energy, Inc. (NYSE:EGY) stock is about to trade ex-dividend in four days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Accordingly, VAALCO Energy investors that purchase the stock on or after the 23rd of August will not receive the dividend, which will be paid on the 20th of September.

The company's next dividend payment will be US$0.0625 per share. Last year, in total, the company distributed US$0.25 to shareholders. Last year's total dividend payments show that VAALCO Energy has a trailing yield of 3.7% on the current share price of US$6.67. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for VAALCO Energy

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Fortunately VAALCO Energy's payout ratio is modest, at just 31% of profit. A useful secondary check can be to evaluate whether VAALCO Energy generated enough free cash flow to afford its dividend. It distributed 35% of its free cash flow as dividends, a comfortable payout level for most companies.

It's positive to see that VAALCO Energy's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by VAALCO Energy's 13% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past three years, VAALCO Energy has increased its dividend at approximately 24% a year on average.

To Sum It Up

From a dividend perspective, should investors buy or avoid VAALCO Energy? VAALCO Energy has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of VAALCO Energy's dividend merits.

While it's tempting to invest in VAALCO Energy for the dividends alone, you should always be mindful of the risks involved. For example - VAALCO Energy has 1 warning sign we think you should be aware of.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.