Hillcrest Energy Technologies. (CSE: HEAT)
From concept to commercialization, Hillcrest is investing in the development of energy solutions that will power a more sustainable and electrified future.
The benefits of investing in quality dividend stocks are long-term wealth creation and as a reliable source of passive income. Therefore, to avoid falling into the dividend trap, investors should focus on companies with strong financials, healthy payout ratios, and solid balance sheets. On the Toronto Stock Exchange, a small-cap energy stock is now paying a 10.5% dividend yield – is it a dividend trap or an opportunity to buy the dip?
With a current market cap of C$172 million, Alvopetro Energy (TSXV:ALV) is Brazil’s first integrated onshore natural gas provider and has returned over 700% since the beginning of 2018. However, this small-cap energy stock is still currently trading 51% below its all-time high.
In fact, the company is not only the largest oil producer in South America, but also the ninth largest in the world. Brazil’s stable regulatory framework is attracting new investment in the energy sector, allowing Alvopetro to be fully committed to expansion into the onshore oil and gas market.
The financial report showed that in the first quarter of 2024, the company’s average daily sales volume fell 39 per cent year-on-year due to lower demand for natural gas. The lower sales volumes resulted in a $6.4 million year-on-year decrease in revenue, despite the average realised price of natural gas being 4% higher than the same period last year. Additionally, the company reported net earnings from operations of $66.16 per barrel of oil for the first quarter, representing a margin of 87 per cent. Oil producers with higher net earnings margins are typically oil companies running efficiently.
Alvopetro’s first quarter funds flow from operations was $8.5 million or $0.23 per share, down $6.5 million year-over-year. Capital expenditures totalled $2.4 million, implying that its free funds flow was $6.1 million. The dividend payout was $3.3 million, suggesting that Alvopetro’s payout ratio of 54% at the end of the first quarter is sustainable.
Since 2020, the company has used 43% of its capital flow for reinvestment and 48% for dividends, repurchases, capital leases and debt or interest payments. Over the past five years, Alvopetro Energy stock has returned more than 74% to shareholders, easily outperforming the broader market as dividend-adjusted returns have exceeded 100%. Analysts who have tracked the energy stock for a long time expect adjusted earnings to increase from C$1.05 per share in 2023 to C$1.33 per share in 2024. So, at a price-to-earnings ratio of 3.6 times, this energy stock is a bargain indeed.
Admittedly, Alvopetro stock is a high-risk investment, as the earnings base is not yet stable and could result in a dividend cut if commodity prices move significantly lower. However, investors may consider holding a small amount of this high-yielding stock in order to generate excess returns when market sentiment improves.
