PHX Energy Services Corp.'s (TSE:PHX) dividend will be increasing from last year's payment of the same period to CA$0.15 on 16th of January. This will take the dividend yield to an attractive 7.8%, providing a nice boost to shareholder returns.
PHX Energy Services' Payment Has Solid Earnings Coverage
A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, PHX Energy Services' earnings easily covered the dividend, but free cash flows were negative. No cash flows could definitely make returning cash to shareholders difficult, or at least mean the balance sheet will come under pressure.
According to analysts, EPS should be several times higher next year. If the dividend continues along recent trends, we estimate the payout ratio will be 11%, so there isn't too much pressure on the dividend.
The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The annual payment during the last 10 years was CA$0.48 in 2012, and the most recent fiscal year payment was CA$0.60. This works out to be a compound annual growth rate (CAGR) of approximately 2.3% a year over that time. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.
The Dividend Looks Likely To Grow
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. PHX Energy Services has impressed us by growing EPS at 72% per year over the past five years. PHX Energy Services is clearly able to grow rapidly while still returning cash to shareholders, positioning it to become a strong dividend payer in the future.
In summary, while it's always good to see the dividend being raised, we don't think PHX Energy Services' payments are rock solid. While PHX Energy Services is earning enough to cover the payments, the cash flows are lacking. This company is not in the top tier of income providing stocks.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Case in point: We've spotted 4 warning signs for PHX Energy Services (of which 1 doesn't sit too well with us!) you should know about. Is PHX Energy Services not quite the opportunity you were looking for? Why not check out 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.
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