Crescent Point Energy, Canadian Oil Sands, and Penn West Petroleum Have Monster Yields; Should You Buy?

Hunting for monster yields then look no further than Canada’s 60 largest companies.

| More on:
The Motley Fool

The S&P TSX 60 index is composed of Canada’s 60 largest publicly listed companies and typically these companies are associated with solid market share and financial stability. While many of these companies have relatively conservative dividend policies, there are three monster yields of around 6%, making them key candidates for any dividend-focused portfolio.

But not all dividend yields are made the same with high yields forming part of the risk/reward trade off, which goes hand-in-hand with investing.

Buy: Crescent Point Energy

The highest dividend yield in the S&P TSX 60 is paid by light oil heavyweight Crescent Point Energy (TSX: CPG)(NYSE: CPG), at 6.3%, although with a payout ratio in excess of 600%, there are concerns it is unsustainable.

But the company has a history of consistently paying dividends since 2003 while continuing to grow cash flow through growing crude production from accretive transactions and the development of existing assets. Already this year Crescent Point has completed two acquisitions, allowing it to boost its 2014 production guidance and further cash flow growth.

These factors, along with a very conservative degree of leverage, and net debt of a mere 1.1 times cash flow, gives Crescent Point considerable flexibility when managing its balance sheet. This also allows the company to comfortably increase debt if and when required, and Crescent Point will likely be able to sustain this dividend yield for as long as oil production continues to grow.

Buy: Canadian Oil Sands

The second-largest dividend yield in the S&P TSX 60 is paid by Canadian Oil Sands (TSX: COS) at a very juicy 6%, and it also boasts a sustainable payout ratio of 82%. The company has been beset by production outages caused predominantly by unexpected maintenance at its upgrader (the machinery that transforms bitumen to light sweet crude).

These outages have caused Canadian Oil Sands to revise its production guidance for 2014 downwards. But despite this and higher than expected operating expenses along with higher debt carrying expense, I believe the dividend is sustainable. Much of the negative impact of these issues on the company’s revenue, cash flow, and bottom line will be offset by better than expected industry fundamentals, including significantly higher crude prices.

This monster yield seems sustainable, making Canadian Oil Sands an attractive investment for income-hungry investors seeking better returns than those available from fixed interest investments such as bonds.

Avoid: Penn West Petroleum 

The third-highest dividend yield in the S&P TSX 60 is paid by troubled intermediate oil producer Penn West Petroleum (TSX: PWT)(NYSE: PWE) at 5.6%, but there are a number of red flags highlighting why this dividend may be unsustainable.

The company reported a net loss for the last two consecutive quarters and continued to have a working capital deficit, despite having made solid progress on implementing its turnaround strategy and divesting itself of a range of unviable assets. In fact, it is the proceeds of these sales that are being used to reduce leverage and fund the working capital shortage. That leads me to speculate that unless Penn West is able to boost margins and cash flow, it will need to continue funding this shortage through debt once asset sales have been completed.

Furthermore, the company continues to see oil and gas production fall which when coupled with a low margin or netback per barrel produced of $36.67 for the first quarter 2014, further highlights profitability remains an issue. This leads me to believe Penn West’s juicy dividend yield may be cut again if fundamentals in the energy patch, including oil prices, were to weaken.

Clearly Canada’s 60 largest companies offer investors not only the security of investing in large financially stable companies, but also some juicy dividend yields that are attractive for income-hungry investors. But not all of those dividends are created equally, with some being more sustainable than others.

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.

Fool contributor Matt Smith has no position in any stocks mentioned.

More on Investing

Stock analysts were once excited about construction company Aecon as an investment.

Bull or Bear: Why Analysts Changed Their Tune on Aecon Stock

Analysts had been champing at the bit for the construction company, but the tides have turned.

Read more »

Specialty Brands faces higher raw materials costs.
Dividend Stocks

What’s Next for Premium Brands Stock?

Shares of the specialty food production and distribution company have fallen about 25% since last October.

Read more »

Double exposure of a businessman and stairs - Business Success Concept
Dividend Stocks

2 Interesting Buys in Any Market

Here are two intriguing buys in any market climate that offer defensive appeal as well as growth and income earning…

Read more »

Bank sign on traditional europe building facade
Bank Stocks

Should You Buy Bank Stocks Now?

Canadian bank stocks are getting cheap. Is this the right time to buy?

Read more »

stock data
Stocks for Beginners

2 Reliable Stocks Beginners Can Buy Amid the Market Selloff

As the broader market turmoil continues, new investors can buy these two reliable dividend stocks to get good returns on…

Read more »

Biotech stocks can be good yet risky investments.

Is Bellus Health Stock Still a Buy After 30% Earnings Jump?

The biotech continues to make progress on obtaining FDA approval for its chronic-cough therapy.

Read more »

Dividend Stocks

TFSA Investors: 3 TSX Stocks for Tax-Free Passive Income

These Canadian corporations have strong visibility over future earnings and dividend payouts.

Read more »

Piggy bank next to a financial report

Do You Have Cash Sitting in Your TFSA? Now Is a Great Time to Buy Stocks

If you have cash in your TFSA that you're looking to invest, now is a great time to buy high-quality…

Read more »