Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Peyto Exploration & Development Corp. (TSE:PEY) is about to go ex-dividend in just 4 days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Meaning, you will need to purchase Peyto Exploration & Development's shares before the 30th of August to receive the dividend, which will be paid on the 13th of September.
The company's next dividend payment will be CA$0.11 per share, on the back of last year when the company paid a total of CA$1.32 to shareholders. Looking at the last 12 months of distributions, Peyto Exploration & Development has a trailing yield of approximately 9.0% on its current stock price of CA$14.68. If you buy this business for its dividend, you should have an idea of whether Peyto Exploration & Development's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Its dividend payout ratio is 84% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be worried about the risk of a drop in earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out 110% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.
Peyto Exploration & Development paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Peyto Exploration & Development's ability to maintain its dividend.
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. For this reason, we're glad to see Peyto Exploration & Development's earnings per share have risen 14% per annum over the last five years. Earnings have been growing at a decent rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
We'd also point out that Peyto Exploration & Development issued a meaningful number of new shares in the past year. It's hard to grow dividends per share when a company keeps creating new shares.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Peyto Exploration & Development has lifted its dividend by approximately 3.2% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Peyto Exploration & Development is keeping back more of its profits to grow the business.
Final Takeaway
Is Peyto Exploration & Development an attractive dividend stock, or better left on the shelf? Earnings per share growth is a positive, and the company's payout ratio looks normal. However, we note Peyto Exploration & Development paid out a much higher percentage of its free cash flow, which makes us uncomfortable. All things considered, we are not particularly enthused about Peyto Exploration & Development from a dividend perspective.
So if you want to do more digging on Peyto Exploration & Development, you'll find it worthwhile knowing the risks that this stock faces. To help with this, we've discovered 3 warning signs for Peyto Exploration & Development that you should be aware of before investing in their shares.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
