Does Husky Energy Inc. Really Yield 8%?

Husky Energy Inc. (TSX:HSE) seems to have a dividend of 8%, but there’s a big catch.

The Motley Fool

As Canadian equities continue to languish, many companies are seeing their dividend yields creep up, especially in the energy sector. One of these companies is Husky Energy Inc. (TSX:HSE), whose dividend yield is over 8%. This is good enough for third place on the S&P/TSX 60, trailing only TransAlta and Potash Corporation of Saskatchewan.

Yet Husky Energy’s dividend comes with a big catch. It’s one that you can’t see just from looking at finance websites. And it means that Husky’s realistic dividend yield is actually zero.

For those of you who haven’t been following the company, we take a closer look below.

The background

Husky Energy, just like any other energy company, struggled with low oil prices in 2015. Through the first nine months of the year the company generated just $90 million in free cash flow–not nearly enough to cover its $875 million in dividend payments.

Other high-yielding energy companies reacted by cutting their dividends. But not Husky. The company held firm on its $0.30 quarterly payout. To make up the cash shortfall, it issued preferred shares and debt.

The balance sheet tells the story. At the beginning of 2015 Husky’s debt balance totaled $4.1 billion, and it had $530 million of outstanding preferred shares. Nine months later, those numbers had ballooned to $6.0 billion and $870 million, respectively. Clearly, something had to be done.

A stock dividend

While reporting its third-quarter results, Husky made a big change to its dividend. Instead of cutting the payout, the company announced that all future dividends would be paid in shares rather than cash.

So if you’re a shareholder, you’ll receive more stock every quarter. But so will every other shareholder. Thus your percentage ownership in the company will never change, and you’ll receive no cash either.

In other words, the Husky dividend is completely worthless and might as well have been cut altogether.

Why did the company do this?

Husky’s actions are certainly strange, and it’s difficult to see what the motivation was, but there’s one possible answer.

If Husky had eliminated its dividend altogether, then its shares would have a yield of zero, and dividend investors would not even consider buying Husky. But with a stock dividend, Husky still officially sports an 8% yield. So this tactic may have provided a small boost to its share price.

Husky has plenty of motivation to keep its share price high. Just last month the company filed a short-form prospectus, which allows for more capital raising in the future. And the higher the share price, the easier capital raising is.

So if you’re looking for big dividends, don’t be misled by such tricks. There are certainly better options for your portfolio.

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 Benjamin Sinclair has no position in any stocks mentioned.

More on Dividend Stocks

stock research, analyze data
Dividend Stocks

How Much to Invest to Get $500 in Dividends Every Month

TSX dividend stocks such as Enbridge, TD Bank, and Telus, can help you earn $500 in monthly dividend payments.

Read more »

Golden crown on a red velvet background
Dividend Stocks

Dividend Powerhouses: Canadian Stocks to Fuel Your Portfolio

These two top Canadian dividend aristocrats are some of the top stocks on the TSX to buy now and hold…

Read more »

Dial moving from 4G to 5G
Dividend Stocks

This Undervalued Dividend Stock is Worth Buying Right Now

Want an undervalued dividend stock with long-term potential and a juicy yield? Here's an option you may regret not buying…

Read more »

A worker gives a business presentation.
Dividend Stocks

1 Stock I’m Buying Hand Over Fist in July Despite the Market’s Pessimism

This top dividend stock is going through a rough patch, but don't let that count out all the growth we've…

Read more »

person on phone leaning against outside wall with scenic view at airbnb rental property
Dividend Stocks

2 TSX Stocks Poised to Have a Big Summer

Restaurant Brands International (TSX:QSR) stock and another darling that could be too cheap to ignore this summer.

Read more »

HIGH VOLTAGE ELECRICITY TOWERS
Dividend Stocks

Forget Fortis Stock: Buy This Magnificent Utilities Stock Instead

Looking for high dividends and returns? Then I'm sorry, but Fortis (TSX:FTS) stock probably isn't for you.

Read more »

Increasing yield
Dividend Stocks

2 High-Yield (But Slightly Risky) Stocks to Keep Your Eye on

Have these top TSX dividend stocks finally bottomed?

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Dividend Stocks I’d Buy if They Fall a Bit

Any near-term decline in these two top Canadian dividend stocks will make them look even more attractive.

Read more »