Investing in quality dividend stocks can help you create long-term wealth and a reliable passive-income stream. Alternatively, it’s crucial for investors to avoid chasing stocks with a high yield and focus on companies with strong financials, a healthy payout ratio, and a robust balance sheet.
In this article, I have identified a small-cap energy stock with a tasty yield of 10.5%. Let’s see if you should buy this dividend stock because of its elevated dividend payout in 2024.
An overview of Alvopetro Energy
Valued at $172 million by market cap, Alvopetro Energy (TSXV: ALV) is an independent Brazil-based upstream and midstream operator. It is the first Brazilian integrated onshore natural gas provider and has returned over 700% since the start of 2018. Despite these market-thumping gains, ALV stock trades 51% below all-time highs and is priced at a compelling valuation.
Alvopetro is the largest oil producer in South America and the ninth largest globally. Brazil’s stable regulatory framework is attracting new investments in the energy sector and enabling Alvopetro to expand in the onshore oil and gas market.
Is Alvopetro Energy a good buy right now?
In the first quarter (Q1) of 2024, its daily sales averaged 1,701 boepd (barrels of oil equivalent per day), down 39% from the year-ago period due to lower natural gas demand. Its average realized natural gas price was US$12.57/Mcf, 4% higher than the year-ago period. Lower sales volumes meant its natural gas, condensate, and oil revenue fell by US$6.4 million year over year to US$11.8 million.
The company’s operating netback in Q1 was US$66.16 per boe, indicating an 87% margin. A netback summarizes the costs associated with bringing a single unit of oil to the marketplace and the revenue earned from the sale of this particular unit. Oil producers with higher netback ratios will typically have an efficiently run oil company.
Alvopetro Energy’s funds flow from operations stood at US$8.5 million or US$0.23 per share in Q1, a decline of US$6.5 million year over year. Its capital expenditures totalled US$2.4 million, which means its free fund flow stood at US$6.1 million. Given its dividend payout of US$3.3 million, Alvopetro ended Q1 with a payout ratio of 54%, which is sustainable. Despite its manageable payout, Alvopetro reduced its quarterly dividend of US$0.09 per share in the current quarter.
Is Alvopetro stock undervalued?
Since 2020, it has reinvested 43% of its funds flow and allocated 48% towards dividends, buybacks, capital leases, and debt or interest payments.
In the last five years, Alvopetro Energy stock has returned over 74% to shareholders, easily beating the broader markets, given that dividend-adjusted gains are over 100%. Analysts tracking the energy stock expect adjusted earnings to expand from $1.05 per share in 2023 to $1.33 per share in 2024. So, priced at 3.6 times forward earnings, ALV stock is really cheap.
Alvopetro stock is a high-risk investment due to its volatile earnings base, which might lead to further dividend cuts if commodity prices move lower. However, investors can consider gaining a small exposure to this beaten-down dividend stock to benefit from outsized gains when market sentiment improves.
