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Is Crescent Point Energy Corp. a Safe Income Investment?

Crescent Point Energy Corp. (TSX: CPG)(NYSE: CPG) has been a favourite among income investors for several years. The company’s juicy dividend yield always ranks in the top five on the S&P/TSX 60 Index and shareholders have gotten comfortable with the consistent returns.

Recently, investors have been reminded that Crescent Point’s stock can be extremely volatile. In the past few weeks, the price of oil plummeted, taking down the entire energy sector with it. Crescent Point’s shares have certainly not been spared. The stock has dropped 18% in the past three months and investors who hold the company as a source of supplementary income are starting to worry that a prolonged drop in the price of oil will put Crescent Point’s beloved dividend at risk.

Let’s take a look at the company’s current situation and see if you should buy, hold, or get out of Crescent Point Energy Corp.

Payout ratio

Crescent Point’s habit of paying out more than 100% of its free cash flow is the No. 1 reason many investors avoid the stock, especially those located south of the border. Conservative investors like to see free cash flow spread out among capital projects, acquisitions, dividends, and share buybacks.

The company gives all its earnings to shareholders and then taps the capital markets when it needs to raise funds for acquisitions or development projects. The practice is considered to be risky for investors because it relies on the willingness of the market to regularly buy up new debt and share offerings.

So far, the model has worked well. Using the high dividend payout as an incentive, Crescent Point always seems to find enough new investors.

In recent years, the company has realized that U.S. investors have largely avoided the stock. So it has worked hard to bring the payout ratio down and stated in its Q2 2014 earnings report that the payout is at the lowest level in its history. It is still above 100%, but the trend is moving in the right direction.

Production growth

The only way to make the model work is to deliver consistent production growth through strategic acquisitions and a very efficient development program. In 2014, the company has spent $2 billion to buy new assets and another $2 billion on capital projects.

The company expects year-over-year cash flow to be 16% higher in 2014.

Earnings and dividend reliability

Crescent Point has never cut its dividend. The current slide in the price of oil is certainly cause for concern for some companies, but Crescent Point’s management team has been through this before and navigated the storm without penalizing its investors. The company utilizes an aggressive hedging program to protect cash flow during times volatility in the market, so the recent drop in oil prices should have a smaller effect on short-term earnings than the market appears to be pricing in.

Crescent Point pays a dividend of $2.76 per share that yields about 7.4%.

The bottom line

Higher U.S. oil production and slowing global growth could keep a lid on crude prices in the next few quarters. At the same time, the world is riddled with armed conflict and the next major international event could send the price of crude back over $100 very quickly.

If oil prices stabilize near $80, Crescent Point’s dividend should be safe. If you believe oil is headed for $50, then it would be best to avoid the sector altogether.

I wouldn’t sell the shares at current levels, and any further weakness in the stock will probably present a good opportunity to add some Crescent Point to your portfolio.

If Crescent Point’s volatility is too much for you too handle, you might want to check out our free report listed below on three dividend champions that are much more stable.

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Crescent Point has an attractive yield but the recent volatility might be a bit much for income investors who prefer more stability.

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Fool contributor Andrew Walker has no position in any stocks mentioned.

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