Premier Oil PLC (ADR) (OTCMKTS:PMOIY) is one the stocks in the oil sector that has the highest level of dividend cover. It has a cover of 8.8x earnings with an anticipated yield of 2.9%. The cover is a significant tool for analysts and investors and works as a security metric. The analysts reach the cover by dividing annuals earnings per share by dividend per share. Premier Oil is keeping a decent ratio of profit instead of passing it complete to shareholders.
Premier Oil has a cover of 8.8x earnings which is regarded more than sufficient. It is retaining much more cash than it is paying out. It can be considered as a wise approach as the oil prices have plunged sharply and are trading around $50 per barrel. If the conditions deteriorate, the oil prices can fall further in the year. In such a scenario, it is important for oil companies to maintain a healthy balance sheet. Not to forget, the cover is an important indication of financial health and earnings persistence when compared over a period of years.
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Currently, only Tullow Oil Plc (UK) (OTCMKTS:TUWOY) carries negative dividend cover. Recently, it announced almost £2.2 billion of write-downs on assets. During the same time, Premier Oil announced $300 million of write-downs will be done in near term. Also, the development spending is under review.
A look at some of the oil and gas traded stocks reflects that dividend cover was high in FY2014, and Premier Oil topped the chart. The median dividend cover was around reasonable 2.4x earnings. The investors are already feeling nervous after the sharp fall of oil from $110 to $50 a barrel in last few months. Relative to the market, the oil segment as a whole underperformed 36% in the past six months.