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Dividend paying stocks like Tsakos Energy Navigation Limited (NYSE:TNP) tend to be popular with investors, and for good reason – some research shows that a significant amount of all stock market returns come from reinvested dividends. Unfortunately, one common occurrence with dividend companies is for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
A high yield and a long history of paying dividends is an appealing combination for Tsakos Energy Navigation. It’s likely that plenty of investors have purchased it for the income. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.Click the interactive chart for our full dividend analysis
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. So we need to be form a view on if a company’s dividend is sustainable, relative to its net profit after tax. Although it reported a loss over the past 12 months, Tsakos Energy Navigation currently pays a dividend. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.
As a loss-making company, we can also measure Tsakos Energy Navigation’s dividend payments against its levered free cash flow, to see if enough cash was generated to cover the dividend. The company paid out 78% of its free cash flow as dividends last year, which is adequate, but reduces the wriggle room in the event of a downturn.
Is Tsakos Energy Navigation’s Balance Sheet Risky?
Given Tsakos Energy Navigation is paying a dividend but reported a loss over the past year, we need to check its balance sheet for signs of financial distress. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA measures a company’s total debt load relative to its earnings (lower = less debt), while net interest cover measures the company’s ability to pay the interest on its debt (higher = greater ability to pay interest costs). With net debt of more than 5x EBITDA, Tsakos Energy Navigation could be described as a highly leveraged company. While some companies can handle this level of leverage, we’d be concerned about the dividend sustainability if there was any risk of an earnings downturn.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company’s net interest expense. With EBIT of less than 1 times its interest expense, Tsakos Energy Navigation’s financial situation is potentially quite concerning. Readers should investigate whether it might be at risk of breaching the minimum requirements on its loans. High debt and weak interest cover are not a great combo, and we would be cautious of relying on this company’s dividend while these metrics persist.
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well – nasty. For the purpose of this article, we only scrutinise the last decade of Tsakos Energy Navigation’s dividend payments. The dividend has been cut by more than 20% on at least one occasion historically. During the past ten-year period, the first annual payment was US$0.60 in 2009, compared to US$0.20 last year. This works out to a decline of approximately 67% over that time.
Dividend Growth Potential
With a relatively unstable dividend, and a poor history of shrinking dividends, it’s even more important to see if EPS are growing. Over the past five years, it looks as though Tsakos Energy Navigation’s EPS have declined at around 21% a year. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company’s dividend.
We’d also point out that Tsakos Energy Navigation issued a meaningful number of new shares in the past year. 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.
To summarise, shareholders should always check that Tsakos Energy Navigation’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We’re a bit uncomfortable with its high payout ratio, although we note cashflow was stronger than income. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. There are a few too many issues for us to get comfortable with Tsakos Energy Navigation from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.
Given that earnings are not growing, the dividend does not look nearly so attractive. Businesses can change though, and we think it would make sense to see what analysts are forecasting for the company.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.