Vermilion Energy Brings Both Value and Top of the Line Dividend Yields
Back in late February I wrote an article on Vermilion Energy (VET) in which I talked about how the stock was one of my favorite high dividend yield value plays. Today the stock is even more under-valued and continues to produce an incredible 13.9% annual dividend yield payed out on a monthly basis. VET has delivered well in earnings since I last looked into the company beating on revenue in both June and March conference calls. A combination of macroeconomic headwinds and EPS misses have led to a significant pullback over the last 6 months as oil supplies continue to grow. A combination of a high yield and under-valuation has the power to bring big gains, and with monthly payouts compounding, it pays to wait (Figure 1).
(Figure 1) The Power of Monthly Dividend Payments Can Easily Be Seen Over Time Compared to Quarterly and Even Annually
Compared to other small to mid-cap energy companies, VET is trading at a very enticing valuation with just an 8.2x P/E ratio (Figure 2). This valuation along with what has been a rapidly growing annual revenue as well as one of the markets highest paying dividends make Vermilion Energy’s stock a rare three headed dragon.
(Figure 2) Vermilion Energy Trades at the Bottom of an Energy Sector Nearing Cyclical Lows
The main drag on Vermilion’s stock right now is the declining oil price, which is threatening to fall below $50 for the first time in nearly a year. Although this is a extremely cyclical environment, so it is nothing major to worry about for investors willing to have patience and wait out the storm. If VET can continue to deliver surprise revenue growth as they have been and oil can make its way back up to the $70-$80 range, I see no reason why VET could not return to the $23-$25 in April and May (The last considerable rise in oil prices). This would hint at a 50-66% upside along with the incredible 13%+ dividend in as little as a years time. Even if the stock falls short of this prediction it would still most likely well out pace the market average.
One of the biggest uncertainties with Vermilion Energy right now is the state of the dividend. With stock prices falling rapidly the stability of the monthly dividend yield always comes to question. There has been no indication of a dividend cut with free cash flow on the rise (Figure 3) and CEO Anthony Marino reaffirming again and again in earnings that the dividend will continue to be payed out. The only way I see a dividend cut coming into play is if the company decides to do a large buyback of shares which would be a rather neutral situation for shareholders.
Overall, I see very little downside for VET with a level of support around the low $14 price mark. This would indicate a downside of less than 8% barring any substantial macroeconomic headwinds coming into play.
Investors biggest fear for Vermilion Energy remains the stability of the dividend. Even if the dividend were to be cut the company has the cash for significant buybacks. VET has always been a very shareholder friendly company and following a major pullback their stock can now offer potential in deep-value, strong growth, and an market leading dividend yield. This makes Vermilion very appealing to all kinds of investors. The key to this trade is it will not be an overnight turnaround. When investing in VET, one will have to have the patience to wait out the cyclical return in oil prices which could take anywhere from 4-12 months. If all goes well an approximately 60% upside is in store (~$25 price target) and you could get paid a 13.9% dividend to wait out the storm. That is why Vermilion is currently my favorite strong buy in the oil and gas sector.
Disclosure: I am/we are long VET. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.