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)

$497

6.5%

8.5%

Pacific Rubiales Energy (TSX:PRE)

$6,948

7.2%

2.1%

Cdn Natural Resources (TSX:CNQ)

$32,683

7.8%

1.7%

Whitecap Resources (TSX:WCP)

$1,406

9.8%

5.8%


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

Redwood trees stretch up to the sunlight.
Dividend Stocks

2 TSX Growth Stocks Set Up for Outsized Gains in 2024

Considering the growth prospects that these two TSX stocks offer, I would keep a very close eye on them as…

Read more »

movies, theatre, popcorn
Investing

3 Things You Need to Know if You Own CGX Stock Today

Cineplex stock remains in the doghouse, trading at 2.6 times earnings, but there are clear signs of an upcoming rebound.

Read more »

Growing plant shoots on coins
Dividend Stocks

3 Strong Dividend Stocks I’d Add to My Portfolio Right Now

Given their solid underlying businesses, stable cash flows, and high yields, these three dividend stocks are an excellent addition to…

Read more »

TIMER SAYING TIME FOR ACTION
Bank Stocks

1 Dividend Stock Down 20% to Buy Right Now

This dividend stock provides investors with more growth towards all-time highs, as well as a superior dividend yield over 6%.

Read more »

ETF chart stocks
Dividend Stocks

Got $500 to Invest in Stocks? Put It in This Index Fund

This ETF is one of the best options for those with a bit of cash, who don't want to worry…

Read more »

Tech Stocks

Nvidia Stock Is Making History: Will It Make New Investors Any Money?

Nvidia stock (NASDAQ:NVDA) continues to surge past all-time highs, with shares up 265% in the last year alone! But can…

Read more »

data analyze research
Stocks for Beginners

3 Reasons to Buy Dollarama Stock Like There’s No Tomorrow

Dollarama (TSX:DOL) stock has seen massive growth this last year, but more could be on the way -- not just…

Read more »

warning or alert
Dividend Stocks

Help! How Do I Get Rid of My Stock Duds?

Stock duds can prevent you from making really big returns and using that cash to fund future investments. How do…

Read more »