We recently compiled a list of the 10 Best Debt Free Dividend Stocks to Invest in. 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 is not necessarily a bad thing; its effect is determined by how efficiently it is handled. When used wisely, it can generate strong cash flow and boost shareholder returns. On the other hand, ineffective debt management can undermine a company’s financial health. According to data from S&P Global Market Intelligence, the total debt among US nonfinancial companies with credit ratings from S&P Global Ratings hit a new high in the third quarter. The combined debt for these rated nonfinancial firms grew by approximately 0.5% during the period, reaching $8.453 trillion and surpassing the previous record of $8.431 trillion set in the first quarter. The rise was primarily driven by investment-grade companies—those rated BBB- and above—which saw their total debt climb to $6.628 trillion in the third quarter, up from $6.493 trillion in the previous quarter.
The report further mentioned that debt levels among non-investment-grade companies rose across six sectors while declining in four. Among lower-rated firms, consumer staples companies saw the largest increase in leverage during the quarter, with total debt climbing to $88.80 billion from $58.70 billion in the previous quarter.
Also read: 13 Best Warren Buffett Dividend Stocks To Invest In Right Now
With borrowing costs on the rise, companies are increasingly turning to equity markets as a way to reduce debt. According to Bloomberg data, debt repayment was listed as a purpose for proceeds in over $28 billion worth of IPOs completed in the 12 months leading up to April, marking a 56% increase from the previous year. While bankers initially expected an even greater number of debt-driven stock offerings, many companies had secured favorable borrowing terms during the pandemic, reducing the urgency for such moves. However, asset managers note that as central banks delay interest rate cuts, higher borrowing costs are beginning to take a toll. This may prompt more companies to capitalize on strong equity markets to ease financial risk.
Although many US companies have solid balance sheets, a notable portion of defaults has come from lower-rated firms struggling with negative cash flow, high debt burdens, and limited liquidity. These highly leveraged businesses, often labeled as “zombies,” barely manage to cover their interest payments and remain highly vulnerable to even minor financial pressures. According to an Associated Press analysis, nearly 7,000 publicly traded companies worldwide—including 2,000 in the US—fall into this category. Many of these firms took on substantial debt at low interest rates over the years, only to face mounting pressure as persistent inflation drove borrowing costs to their highest levels in a decade. Instead of using borrowed funds for expansion, hiring, or technological upgrades, a significant portion was allocated to stock buybacks.
Relying on debt to sustain dividend payments is generally viewed negatively, particularly given the practices seen during the 2020 pandemic. During that period, many private companies resorted to dividend recapitalization, borrowing funds to continue distributing dividends. This trend carried over into 2024. By September 30, US companies—including those without private equity backing—had raised a record $70.2 billion in leveraged loans for dividend recapitalizations, according to PitchBook data. This figure exceeds the previous peak of $67.2 billion set in 2021.
Nevertheless, many companies have kept their balance sheets stable, with US firms regularly reaching new highs in dividend payouts each year. Given this, we will take a look at some of the best debt free stocks that pay dividends.
Our Methodology:
To create this list, we first used a screener and identified companies with minimal or no debt. From this pool, we selected those that consistently pay dividends to shareholders and compared their enterprise value (EV) to their market capitalization to gauge which ones are debt-free. We then narrowed down the list by including stocks that had sustainable dividend yields. From that list, we picked 10 companies with the highest number of hedge funds having stakes in them, as per Insider Monkey’s database of Q3 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)
Number of Hedge Fund Holders: 7
Market Cap as of December 7: $132.24 million
Enterprise Value as of December 7: $124.4 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. In the third quarter of 2024, the company reported revenue of $7.29 million, reflecting an increase from $6.31 million in the same period the previous year. The figure also surpassed analysts’ expectations by approximately $403,000. Capital expenditures for the quarter, which ended on September 30, 2024, totaled $3.9 million. These costs were primarily associated with completing one gross (0.25 net) well in Ector County, Texas, and drilling two gross (1 net) wells in Alberta, Canada.
In the most recent quarter, Epsilon Energy Ltd. (NASDAQ:EPSN) announced its fourth consecutive quarter of growth in liquid volume, revenue, and cash flow from its Permian assets, which has helped mitigate the effects of current natural gas prices. In Pennsylvania, both production and cash flow are anticipated to rise in the fourth quarter and continue improving into the following year, driven by a more favorable natural gas market. With a diversified and growing asset portfolio, the company remains well-positioned for continued expansion in both volume and cash flow in 2025. In the past 12 months, the stock has delivered a nearly 19% return to shareholders.
In addition to its strong earnings and returns, Epsilon Energy Ltd. (NASDAQ:EPSN) showcased solid cash generation, producing more than $11.8 million in operating cash flow during the first nine months of the year. By the end of the quarter, the company held over $8.3 million in cash and cash equivalents. Moreover, it returned $2 million to shareholders through dividends and share buybacks. The company offers a quarterly dividend of $0.0625 per share for a dividend yield of 4.21%, as of February 11.
Overall EPSN ranks 9th on our list of the best debt free dividend stocks to invest in. While we acknowledge the potential for EPSN as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than EPSN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.