Spark Energy: Is This Small Cap’s 7.5% Yield Safe?

When most people think of small cap or microcap stocks, dividend payers typically don’t come to mind. However, some of the tiniest companies not only pay dividends, but also pay big ones…

Take Spark Energy (Nasdaq: SPKE), for example. Despite its $339 million market cap, it yields a whopping 7.5%.

Spark Energy is a Houston-based electricity and natural gas provider to more than 700,000 customers in 19 states. In 2017 and 2018, its free cash flow declined, but that changed in a big way in 2019 when free cash flow jumped 55%. The company is so small that only one Wall Street analyst covers it. And that analyst has not published any free cash flow estimate for 2020 or 2021.

In the first three quarters of 2020, revenue was down significantly, but so were expenses. The company was actually more profitable through the first nine months of last year than it was in 2019.

Free cash flow also climbed 9%. For full year 2020, I expect free cash flow to come in around $111 million.

A Stable Dividend

Spark Energy pays a quarterly $0.18 per share dividend, which comes out to a 7.5% yield. The dividend has remained the same (taking a 2017 stock split into account) since 2015.

In 2019, Spark paid out $53.3 million in dividends. It is expected to pay the same amount for 2020.

That’s a payout ratio of 58.9% in 2019 and 48% in 2020.

Followers of the Safety Net column know that once the pandemic hit, I lowered my threshold for an acceptable payout ratio in order to get more conservative. I didn’t want to get caught by surprise by a dividend cut during uncertain times.

Typically, the maximum payout ratio that I want to see is 75%. However, that level has been lowered to 50% for the time being.

That means Spark gets a penalty for a 2019 payout ratio that’s just a little too high under the new limit, but it just squeaks by for 2020, assuming free cash flow comes in at $106.6 million or more.

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