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Peyto Exploration & Development Corp. (TSE:PEY) has announced that it will pay a dividend of CA$0.11 per share on the 15th of October. This makes the dividend yield 8.8%, which will augment investor returns quite nicely.
Check out our latest analysis for Peyto Exploration & Development
Peyto Exploration & Development's Future Dividend Projections Appear Well Covered By Earnings
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Peyto Exploration & Development's dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 113% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.
Over the next year, EPS is forecast to expand by 100.8%. If the dividend continues along recent trends, we estimate the payout ratio will be 40%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.
Dividend Volatility
The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2014, the annual payment back then was CA$0.96, compared to the most recent full-year payment of CA$1.32. This means that it has been growing its distributions at 3.2% per annum over that time. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.
Peyto Exploration & Development Could Grow Its Dividend
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. We are encouraged to see that Peyto Exploration & Development has grown earnings per share at 7.4% per year over the past five years. Recently, the company has been able to grow earnings at a decent rate, but with the payout ratio on the higher end we don't think the dividend has many prospects for growth.
An additional note is that the company has been raising capital by issuing stock equal to 12% of shares outstanding in the last 12 months. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.
Peyto Exploration & Development's Dividend Doesn't Look Sustainable
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Peyto Exploration & Development's payments, as there could be some issues with sustaining them into the future. The payments are bit high to be considered sustainable, and the track record isn't the best. We would probably look elsewhere for an income investment.