Encana’s Dividend Looks Unsustainable – They’re Not Alone

Canadian energy stocks are paying out way more than they should be. Find out which 4 companies are the best of a bad bunch.

| More on:
The Motley Fool

A recent piece in the Wall Street Journal indicated that because of Encana’s (TSX:ECA) high payout rate, the company’s dividend could be “a casualty of any strategy shake-up” once the company finally hires a new CEO.

In my mind, this assessment is bang on.

Encana’s $588 million dividend payout represented about 20% of last year’s cash from operations (CFO).  And, the company generated negative free cash flow (CFO – capital expenditures) of about $500 million over the past 12 months.  This means the dividend is effectively being paid by issuing debt.  Not a sustainable formula.

There’s more

The scariest part of this story is that ECA is not the only one of its Canadian peers that’s paying out a high proportion of its operating cash flow in dividends.  According to Capital IQ, of the 21 energy producing companies in the S&P/TSX Composite that pay a dividend, the average payout from operating cash flow was 28% over the past 12 months.  At 20%, Encana looks relatively good!

The WSJ article indicates that most E&P companies payout 5% of their operating cash in dividends.  We’ll assume their sample was U.S. based as none of the Canadian energy producers met this 5% level.

Tabled below are the 4 seemingly most sustainable dividends in Canada’s energy patch based on payout in relation to operating cash flow over the past 12 months.

Company Name

Market Cap

Payout Rate

Dividend Yield

Petrominerales (TSX:PMG)




Pacific Rubiales Energy (TSX:PRE)




Cdn Natural Resources (TSX:CNQ)




Whitecap Resources (TSX:WCP)




Source:  Capital IQ

Foolish Takeaway

If you’re an investor in Canada’s energy patch and are reliant on dividend cheques from this space, you need to be wary of this issue.  It’s worth your while to review your holdings and examine their cash flows to get a sense for how sustainable these payouts actually are.

We have created a special FREE report that profiles a collection of rock-solid dividend paying stocks whose payouts are more than affordable.  Click here and we’ll send you “13 High-Yielding Stocks to Buy Today” – FREE!

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Iain Butler does not own any of the companies mentioned in this report at this time.  The Motley Fool has no positions in the stocks mentioned above.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

A worker uses a double monitor computer screen in an office.
Dividend Stocks

2 of the Best Canadian Stocks That Pay Out Monthly

These two Canadian dividend stocks are some of the best to buy, offering yields upwards of 5.4% and returning cash…

Read more »

Oil pumps against sunset
Energy Stocks

Suncor Stock: How Low Could it Go in 2023?

Suncor (TSX:SU) is up on the back of a bounce in oil prices but remains out of favour. Can new…

Read more »

clock time
Dividend Stocks

How Investors Can Build a $1 Million Portfolio in 12 Years

If you can handle it, you can certainly create a million-dollar portfolio in just 12 years, especially considering this dividend…

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

Passive-Income Seekers: 4 Safe Dividend Stocks to Own Beyond 2033

Dividend stocks are great, but only if they continue to perform after downturns as well. In the case of these…

Read more »

stock analysis
Tech Stocks

Investing in AI: 1 Cheap Tech Stock Poised for Growth

Docebo is a little-known Canadian tech firm that's unlocking the power of next-generation AI technologies.

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

4 Big Dividend-Paying Stocks for 2023

These four stocks all earn strong cash flow and offer attractive dividend yields, making them some of the best to…

Read more »

A airplane sits on a runway.

1 Growth Stock Down 40% to Buy Right Now

This Canadian stock has years of growth potential, and considering the significant discount it trades at now, it's a top…

Read more »

grow dividends
Dividend Stocks

This 7.5 Percent Dividend Stock Pays Cash Every Month

If you need cash now, this dividend stock is certainly one I would consider that could double in share price…

Read more »