You may not be familiar with Riley Exploration Permian (NYSE: REPX). It’s a small cap oil producer that doesn’t trade a lot of volume each day. But with the stock boasting an attractive 5.4% yield, income investors should give it a look to see if they can rely on the dividend.
The company’s free cash flow has been an adventure. After several years in the tens of millions, it swung to a huge negative in 2023. Then, last year, it soared to its highest level in at least a decade at $117 million.
This year, my forecast is that free cash flow will decline, but barely – to $114 million. It wouldn’t take too much to move that figure above $117 million, which would flip its growth from negative to positive.
With free cash flow growth expected to be negative, Safety Net assesses the stock a one-point penalty. If it turns out that Riley experiences positive free cash flow growth, that penalty will be removed.
The good news is Riley’s payout ratio is low.
Last year, the company paid shareholders $28 million in dividends, or just 24% of its free cash flow. This year, it is forecast to pay just about the same amount, with the payout ratio staying steady at just under 25%.
That means even if free cash flow suffers a big decline, Riley should still have enough cash to sustain the dividend.
For most companies, my threshold for the payout ratio is 75%. In other words, I want to see a company paying out 75% or less of its free cash flow in dividends. That way, there is a buffer between its current cash flow and what it needs to afford its dividend, so a rough year or two wouldn’t jeopardize the payout.
Riley Exploration Permian has paid a dividend since 2021 and has raised it every year since.
So its dividend-paying history is short, but solid.
The only blemish on its dividend safety scorecard is the forecast for slightly lower free cash flow this year. But even then, the company would still have ample amounts of cash to pay the dividend. And if free cash flow comes in just $3 million higher than my projection, even that little ding on its record would go away.
You may not have heard of Riley Exploration Permian before, but with its low risk of cutting its 5.4% dividend yield, it may be worth investigating further.
Dividend Safety Rating: B
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