Investing in a dividend stock can be an effective strategy for generating passive income. One to consider these days could be Cardinal Energy (TSX:CJ), offering an attractive dividend yield of approximately 11.2%. However, it’s essential to evaluate the company’s financial health, earnings performance, and future outlook to determine if this dividend is sustainable and if the stock aligns with your investment goals.
Into earnings
In the second quarter of 2024, Cardinal Energy reported earnings per share (EPS) of $0.25. This fell short of analysts’ expectations of $0.33. Despite this, the company achieved quarterly revenue of $169.35 million, surpassing the consensus estimate of $164.70 million. This indicates robust revenue generation, though the earnings miss suggests potential challenges in cost management or other operational areas.
As of the most recent quarter, Cardinal Energy reported a total debt of $83.15 million and total cash of $6.03 million, resulting in a debt-to-equity ratio of 9.04%. While this indicates a manageable level of debt, the relatively low cash reserves could limit the company’s flexibility in addressing unforeseen financial challenges.
Over the past year, Cardinal Energy’s stock has experienced a decline of approximately 11.1%, thus underperforming the Canadian oil and gas industry, which saw a return of 15.7%, and the broader Canadian market, which returned 27.4% during the same period. This underperformance suggests that the stock has faced challenges relative to its peers and the overall market. But could that mean there’s time for a comeback?
What to consider
Cardinal Energy has been consistent in distributing monthly dividends of $0.06 per share. This results in an annual dividend of $0.72 per share, yielding approximately 11.2% based on the current stock price. However, the company’s dividend-payout ratio stands at 98.63%, indicating that nearly all of its earnings are being returned to shareholders. Such a high payout ratio may not be sustainable in the long term, especially if the company faces earnings volatility.
In fact, the dividend stock’s five-year beta is 2.81, indicating that it is significantly more volatile than the broader market. A beta greater than one suggests that the stock’s price movements are more pronounced compared to the market, leading to higher potential returns but also increased risk.
That being said, Cardinal Energy’s inclusion in the 2024 TSX30 highlights its strong performance over the past three years, with a 134% increase in dividend-adjusted share price and a 111% rise in market capitalization. This could mean there is more for investors to look forward to, but of course, with that comes its own set of risks.
Bottom line
While Cardinal Energy’s high dividend yield is appealing, the sustainability of such payouts is questionable, especially given the high payout ratio and potential earnings volatility. Investors should carefully assess their risk tolerance and consider the company’s financial health, market volatility, and sector-specific risks before making an investment decision.
Cardinal Energy has shown strong long-term performance; its recent underperformance and higher volatility compared to the market are important considerations. Diversifying investments and consulting with a financial advisor can also help in making informed choices aligned with individual financial goals.
