The Motley Fool

Is This Big Dividend Stock Suitable for Your Portfolio?

Image source: Getty Images

The first thing that makes Vermilion Energy (TSX:VET)(NYSE:VET) stand out is its big dividend, which yields close to 9%. Moreover, it has steadily increased its dividend since 2003 — through the last market crash and the oil price collapse.

Why Vermilion offers a big dividend

One reason the stock offers such a big yield is that the stock price has declined by about 34% over the last 12 months. Another reason is that the global oil and gas producer has raised its dividend over time. The combination of its lower stock price and higher dividend per share has pushed Vermilion’s yield to 8.9% at about $31 per share as of writing.

Vermilion estimates that its total payout ratio will be about 88% this year. So, its dividend should be sustainable. After all, there were years since 2003, in which it had payout ratios of more than 100%, but it was still able to maintain its monthly dividend.

Unlike other energy companies such as Suncor Energy, Vermilion doesn’t tend to return capital to shareholders through stock buybacks, which allows more capital to be paid out as dividends.

Notably, Vermilion has a dividend reinvestment plan, which allows shareholders to reinvest their dividends for more shares every month. So, Vermilion’s share count has been rising. From 2012 to 2017, Vermilion increased its outstanding shares on average by about 4.3% per year. From 2017 to 2018, Vermilion’s outstanding shares increased by about 16.3% largely due to the Spartan Energy acquisition. Thankfully, the acquisition was accretive.

First-quarter results

In Q1, Vermilion produced on average 103,404 barrels of oil equivalent per day (boe/d), which aligned with its guidance of 101,000 to 106,000 boe/d for the year.

The company generated funds flows from operations of $1.66 per share, 14.5% higher than the same quarter in the prior year. The increase was primarily due to higher Canadian realized oil prices and increased sales volumes during the quarter.

Foolish takeaway

According to Vermilion’s estimated payout ratio of about 88% this year coupled with the fact that the company has maintained or increased its dividend since 2003 despite certain years having payout ratios of more than 100%, Vermilion’s 8.9% yield appears to be sustainable.

However, the stock is quite volatile due to its sensitivity to and reliance on commodity prices. So, investors should have a high tolerance for risk and aim to buy the stock on meaningful dips. Currently, it’s trading at a relatively low valuation at about five times cash flow at writing.

Thomson Reuters has a 12-month mean target of $42.70 per share on the stock, which represents nearly 38% near-term upside potential. Combined with the big dividend, buyers today are looking at potential total returns of about 46% over the next year.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

Fool contributor Kay Ng owns shares of VERMILION ENERGY INC.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.