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Here's Why We're Wary Of Buying Hallador Energy Company's (NASDAQ:HNRG) For Its Upcoming Dividend

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Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Hallador Energy Company (NASDAQ:HNRG) is about to go ex-dividend in just 3 days. Investors can purchase shares before the 30th of January in order to be eligible for this dividend, which will be paid on the 14th of February.

Hallador Energy's next dividend payment will be US$0.04 per share. Last year, in total, the company distributed US$0.16 to shareholders. Calculating the last year's worth of payments shows that Hallador Energy has a trailing yield of 7.9% on the current share price of $2.02. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Hallador Energy has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Hallador Energy

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Hallador Energy distributed an unsustainably high 196% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out 21% of its free cash flow as dividends last year, which is conservatively low.

It's good to see that while Hallador Energy's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit Hallador Energy paid out over the last 12 months.

NasdaqCM:HNRG Historical Dividend Yield, January 26th 2020
NasdaqCM:HNRG Historical Dividend Yield, January 26th 2020

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Hallador Energy's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 36% a year over the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, nine years ago, Hallador Energy has lifted its dividend by approximately 3.2% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Hallador Energy is already paying out 196% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Should investors buy Hallador Energy for the upcoming dividend? It's not a great combination to see a company with earnings in decline and paying out 196% of its profits, which could imply the dividend may be at risk of being cut in the future. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Want to learn more about Hallador Energy? Here's a visualisation of its historical rate of revenue and earnings growth.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

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.

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. Thank you for reading.