Dividend paying stocks like TGS-NOPEC Geophysical Company ASA (OB:TGS) tend to be popular with investors, and for good reason – some research suggests a significant amount of all stock market returns come from reinvested dividends. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
With TGS-NOPEC Geophysical yielding 3.8% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. It would not be a surprise to discover that many investors buy it for the dividends. The company also returned around 1.4% of its market capitalisation to shareholders in the form of stock buybacks over the past year. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.
Explore this interactive chart for our latest analysis on TGS-NOPEC Geophysical!
Payout ratios
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. While TGS-NOPEC Geophysical pays a dividend, it reported a loss over the last year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.
TGS-NOPEC Geophysical paid out 160% of its free cash flow last year, which we think is concerning if cash flows do not improve. Paying out such a high percentage of cash flow suggests that the dividend was funded from either cash at bank or by borrowing, neither of which is desirable over the long term.
With a strong net cash balance, TGS-NOPEC Geophysical investors may not have much to worry about in the near term from a dividend perspective.
Consider getting our latest analysis on TGS-NOPEC Geophysical’s financial position here.
Dividend Volatility
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. TGS-NOPEC Geophysical has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was US$0.3 in 2011, compared to US$0.5 last year. This works out to be a compound annual growth rate (CAGR) of approximately 3.8% a year over that time. TGS-NOPEC Geophysical’s dividend payments have fluctuated, so it hasn’t grown 3.8% every year, but the CAGR is a useful rule of thumb for…
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