Crescent Point Energy Corp. (TSX: CPG)(NYSE: CPG) pays the second-highest dividend of all the stocks on the S&P/TSX 60 Index. With oil prices on the slide and Crescent Point’s stock price drilling down towards 12-month lows, investors are wondering if the beloved dividend is at risk.
Here are four things to consider when deciding if Crescent Point Energy’s dividend could be headed lower.
1. Dividend history
Crescent Point has weathered rocky oil markets in the past and has never cut its dividend. In fact, shareholders have been rewarded handsomely with a reliable and generous payout for more than a decade. Oil prices are trending lower right now but Crescent Point has an aggressive hedging program designed to protect cash flow in times of volatile prices.
2. Payout ratio
Crescent Point is often criticized because its dividend payout ratio is greater than 100%. This means the company uses debt or stock issuances to make up for the difference between free cash flow and the payout.
The critics have a point, and the practice is generally considered to be very risky for a company’s investors.
However, Crescent Point is finally getting close to actually covering the dividend with free cash flow. In the latest earnings report, the company said its payout ratio is the lowest it has ever been.
There is reason to believe it could drop below 100% in the next two years. Crescent Point is trying to attract more U.S. investors. To do this, the company is bringing the payout ratio down to a level that is more acceptable to the broader investment community.
3. Business model
The high dividend is a core part of Crescent Point’s business model. The company finances its acquisitions and capital programs by borrowing money and issuing new shares. The generous dividend is the main reason investors are willing to buy new stock at premium levels.
Despite the company’s heavy use of debt to finance growth, Crescent Point’s balance sheet is solid. Its projected net debt to 12-month cash flow runs about 1.1 times.
4. Production growth
Crescent Point has spent roughly $2 billion this year on acquisitions and has another $2 billion allocated for capital projects. The company’s main assets are located in the resource-rich Torquay region of Saskatchewan and the Uinta Basin in Utah.
The net result of this year’s acquisitions and successful drilling programs will be a 16% increase in cash flow compared to 2013.
As long as cash flow continues to rise, the dividend should be safe.
The bottom line
There is little evidence that Crescent Point will cut its dividend, even if oil prices continue to fall in the coming months.
The company’s business model relies on the high dividend and the current free cash flow situation is actually much stronger than it has been in the past.
In fact, the company could actually increase the dividend next year if oil prices rebound and Crescent Point is able to hedge enough production at higher prices.
The current payout of $2.76 yields about 6.8%. Investors looking for a reliable income stream should consider picking up the shares while they are under pressure.
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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 Andrew Walker has no position in any stocks mentioned.