Vermilion Energy (TSX:VET)(NYSE:VET) and TORC Oil & Gas (TSX:TOG) are trading at multi-year lows and offer yields of 10% and 7.6%, respectively. Which is more likely to cut its dividend?
There are some things that management can’t control, such as commodity prices, and there are some things that they can control, such as capital allocation (i.e., how much cash flow to allocate for reducing debt, sustaining the business, investing in growth projects, and paying dividends).
Looking at how the companies have handled their capital allocation in the past can give an idea of which oil & gas producer will more likely cut its dividend.
Vermilion’s stock has maintained or increased its cash distribution or dividend every year since 2003. Since 2003, VET’s total payout ratio (which accounts for sustaining capital, growth capital, and dividend) has expanded to as high as 162%, but the company didn’t once cut the dividend.
VET places a high priority on its dividend. If history is indicative of the future, then VET will try to maintain the dividend even when the operating environment is tough.
Notably, VET doesn’t have the tendency to buy back stock like other energy companies, such as Suncor Energy (TSX:SU)(NYSE:SU) and Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ). Last year, the capital the company returned to shareholders was 100% dividends.Read More