Here's Why We're Wary Of Buying U.S. Energy's (NASDAQ:USEG) For Its Upcoming Dividend
Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see U.S. Energy Corp. (NASDAQ:USEG) is about to trade ex-dividend in the next four days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase U.S. Energy's shares before the 18th of May to receive the dividend, which will be paid on the 30th of May.
The company's next dividend payment will be US$0.022 per share, and in the last 12 months, the company paid a total of US$0.09 per share. Based on the last year's worth of payments, U.S. Energy stock has a trailing yield of around 6.9% on the current share price of $1.3. If you buy this business for its dividend, you should have an idea of whether U.S. Energy's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
See our latest analysis for U.S. Energy
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. U.S. Energy paid out 192% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. U.S. Energy paid a dividend despite reporting negative free cash flow last year. That's typically a bad combination and - if this were more than a one-off - not sustainable.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and U.S. Energy fortunately did generate enough cash to fund its dividend. 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 U.S. Energy paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see U.S. Energy has grown its earnings rapidly, up 23% a year for the past five years.
Unfortunately U.S. Energy has only been paying a dividend for a year or so, so there's not much of a history to draw insight from.
Final Takeaway
Is U.S. Energy an attractive dividend stock, or better left on the shelf? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with U.S. Energy. For instance, we've identified 2 warning signs for U.S. Energy (1 makes us a bit uncomfortable) you should be aware of.
Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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