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Tourmaline Oil Corp. (TSE:TOU) has announced that it will be increasing its dividend on the 31st of March to CA$0.20. This takes the dividend yield from 4.0% to 5.3%, which shareholders will be pleased with.
Tourmaline Oil's Dividend Is Well Covered By Earnings
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. However, prior to this announcement, Tourmaline Oil was quite comfortably covering its dividend with earnings and it was paying more than 75% of its free cash flow to shareholders. The business is earning enough to make the dividend feasible, but the cash payout ratio of 79% shows that most of the cash is going back to the shareholders, which could constrain growth prospects going forward.
Looking forward, earnings per share is forecast to fall by 18.8% over the next year. If the dividend continues along recent trends, we estimate the payout ratio could be 71%, which we consider to be quite comfortable, with most of the company's earnings left over to grow the business in the future.
Tourmaline Oil Is Still Building Its Track Record
The dividend hasn't seen any major cuts in the past, but the company has only been paying a dividend for 4 years, which isn't that long in the grand scheme of things. Since 2018, the dividend has gone from CA$0.32 to CA$2.05. This means that it has been growing its distributions at 59% per annum over that time. Tourmaline Oil has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.
The Dividend Looks Likely To Grow
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Tourmaline Oil has seen EPS rising for the last five years, at 42% per annum. Earnings have been growing rapidly, and with a low payout ratio we think that the company could turn out to be a great dividend stock.
We'd also point out that Tourmaline Oil has issued stock equal to 12% of shares outstanding. 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.
Our Thoughts On Tourmaline Oil's Dividend
In summary, while it's always good to see the dividend being raised, we don't think Tourmaline Oil's payments are rock solid. While Tourmaline Oil is earning enough to cover the dividend, we are generally unimpressed with its future prospects. We would probably look elsewhere for an income investment.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 3 warning signs for Tourmaline Oil that investors should take into consideration. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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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.