We recently published a list of 7 Best Debt Free Dividend Stocks To Buy. In this article, we are going to take a look at where Epsilon Energy Ltd. (NASDAQ:EPSN) stands against the other debt free dividend stocks.
Debt financing isn’t always a bad thing; its effect depends on how companies use it. When managed well, it can generate significant cash flow and boost shareholder returns. However, if misused, debt can harm a company’s overall financial health. Though investor sentiment this year is being boosted by expected interest rate cuts from the Federal Reserve, which is also contributing to this year’s stock market rally, companies in the US still carry excessively high levels of debt on their balance sheets. According to a report by S&P Global Ratings, corporate debt defaults surged last year and could pose challenges again in 2024 as companies with limited cash struggle with high interest rates. In 2023, 153 companies failed to meet their debt payment obligations, a significant increase from 85 in the previous year, representing an 80% rise. This marked the highest default rate in seven years, excluding the spike related to COVID-19 in 2020.
While many U.S. companies have strong balance sheets, a significant portion of the defaults came from low-rated companies with negative cash flows, heavy debt burdens, and weak liquidity. Analysts refer to these heavily indebted companies as “zombies,” as they struggle to survive, barely managing to pay the interest on their loans, and are often one setback away from failure. An Associated Press analysis revealed that the number of such companies has surged to nearly 7,000 publicly traded firms worldwide, including 2,000 in the United States. These companies have been affected by years of accumulating cheap debt, followed by persistent inflation that has driven borrowing costs to their highest levels in a decade. Moreover, zombie debt was frequently not used for expansion, hiring, or investing in technology, but rather for repurchasing their own stock.
Read Also: 10 Highest Paying Monthly Dividend Stocks
Financial experts indicate that US companies had an opportunity to reduce their debt obligations following then-President Donald Trump’s 2017 tax overhaul, which lowered corporate tax rates and facilitated the repatriation of overseas profits. However, most of this financial benefit was used for stock buybacks rather than addressing debt. As a result, the situation has deteriorated to the point where the government is projected to spend $870 billion this year just on interest payments on its debt, an increase of one-third from the previous year and more than the defense budget.
Even with the tax overhaul, debt wasn’t going to disappear on its own. According to the Federal Reserve, corporate America held a $13.7 trillion debt load in 2023. Company debt has increased by 18.3% since 2020, as businesses capitalized on the Fed’s interest rate cuts during the early days of the COVID-19 pandemic. Moreover, according to a report by the Wall Street Journal, US companies will need to renegotiate approximately $1.87 trillion in corporate debt over the next few years, facing higher interest rates. This will largely depend on their sales forecasts for the coming months and years, as companies will negotiate to secure the most favorable interest rates possible.
Debt is generally not seen as a favorable option for supporting dividends. This was particularly evident during the 2020 pandemic when many private companies resorted to dividend recapitalization—taking on new debt to fund dividend payments. This practice remains common among private equity-backed firms after the pandemic as well. In the first half of 2024, dividend recapitalizations have surged, with about $30.2 billion in leveraged loans issued to cover these payments, matching the amount seen in 2021, which was the highest in at least a decade, according to PitchBook LCD data.
That said, corporate balance sheets are currently strong, with companies worldwide distributing record dividends to shareholders. In this article, we will discuss some of the best debt free dividend stocks that pay dividends.
We also measured hedge fund sentiment around each stock according to Insider Monkey’s database of 912 funds as of Q2 2024. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A pipeline of natural gas cutting through a rural landscape.
Epsilon Energy Ltd. (NASDAQ:EPSN)
Dividend Yield as of August 16: 4.65%
Market Cap as of August 16: $118.16 million
Enterprise Value as of August 16: $110.1 million
Epsilon Energy Ltd. (NASDAQ:EPSN) is a Texas-based independent oil and natural gas company that specializes in the acquisition, development, gathering, and production of natural gas and oil reserves. The company’s recent quarterly earnings were strong. Its Permian assets have continued to perform strongly, showing significant quarter-over-quarter increases in both oil volumes and revenue. This performance is attributed to a full quarter’s contribution from the acquisition made in the first quarter and one month of production from the sixth well in the Pradera Fuego project. Additional sequential oil growth is anticipated in the third quarter, as the sixth well will have a full quarter of contribution and the seventh well is now on flowback, producing over 700 barrels of oil per day while still being cleaned up.
Epsilon Energy Ltd. (NASDAQ:EPSN) is well-positioned for ongoing growth in the Permian Basin and anticipates significant potential for its Marcellus assets in the coming year, given the improving natural gas environment. With a recently expanded and undrawn credit facility, along with strong cash flows and available cash, the company is in a strong position to maintain its dividend payments and explore promising new projects.
For the first six months of 2024, Epsilon Energy Ltd. (NASDAQ:EPSN) generated over $9 million in operating cash flows. The company started paying dividends in 2022 and has paid regular dividends since then. In the second quarter of 2024, it returned $1.4 million to shareholders through dividends. Currently, it offers a quarterly dividend of $0.0625 per share for a dividend yield of 4.65%, as of August 16.
According to Insider Monkey’s database of Q2 2024, 7 hedge funds held stakes in Epsilon Energy Ltd. (NASDAQ:EPSN), up from 6 in the previous quarter. These stakes are worth over $31.4 million in total. With over 3.6 million shares, Solas Capital Management was the company’s leading stakeholder in Q2.
Overall EPSN ranks 1st on our list of best debt free dividend stocks to buy. While we acknowledge the potential of EPSN as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued dividend stock that is more promising than EPSN but that trades at less than 7 times its earnings and yields nearly 10%, check out our report about the dirt cheap dividend stock.
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Disclosure: None. This article is originally published at Insider Monkey.
