Before the historic crash in oil prices, Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) was a top-tier dividend name in terms of yield. Since 2004 Crescent Point’s yield hasn’t dropped below 6%; in fact, between 2004 and 2010 Crescent Point’s yield didn’t drop below 9% with the exception of a slight drop between 2008 and 2009. Until August 2015, Crescent Point had gone 14 years without cutting its dividend.
Its dividend was a key component of its strategy; CEO Scott Saxberg vowed to never cut it. Unfortunately, the recent oil rout made Crescent Point cut its dividend twice—in August 2015 and March 2016—which brought the dividend from $0.23 per share monthly to $0.03 per share monthly currently. This gives the stock a yield of about 1.7%.
With the oil-price forecast improving and almost no analysts seeing a sustained drop below US$40 a barrel, is Crescent Point set to return to its average yield of about 6%?
The dividend is still important to Crescent Point
There’s a question of whether or not Crescent Point still sees value in having a high dividend yield and a strategy of dividend growth. There have been some changes to Crescent Point’s overall strategy lately, and it seems these changes will place less emphasis on the value of the dividend.
Originally, a high dividend yield was the main component of Crescent Point’s strategy. Crescent Point was hoping that its high yield would attract retail and institutional investors, especially in the U.S., where it was hoping to find a large group of dividend-focused investors to drive the share price up.
In 2014 Crescent Point only had $235 million of free cash flow, yet it paid out a dividend of $1.5 billion ($359 million of which was funded using its DRIP program, which pays out the dividend in shares). Crescent Point was using equity issues to fund its acquisition program as well as part of its dividend, which meant that Crescent Point shareholders were constantly being diluted (earnings-per-share growth lagged net income growth fairly dramatically over time).
Crescent Point has now switched its strategy to focus on per-share growth. This meant eliminating its DRIP program altogether and only making acquisitions that it can fund with its internal cash flow. Today Crescent Point’s annual dividend is only $182 million.
With Crescent Point now wanting to live within its cash flow, only funding its acquisitions with cash flow, and eliminating its DRIP program, it seems unlikely that Crescent Point’s yield will reach prior levels again. Despite this, Crescent Point has made it clear that the dividend is important.
The company listed dividend increases as one of the potential ways it could use the large amount of free cash flow it is expecting over the next couple years. In addition to this, the company has stated it is sticking to a “growth + dividend” strategy, which prioritizes a dividend along with production growth. The company sees the dividend attracting yield-focused investors and providing capital discipline.
Crescent Point can afford a dividend hike
The company uses oil-price assumptions of US$45 per barrel on average in 2016 and US$50 per barrel in 2017, which is a fairly conservative outlook, especially since the IEA sees a slight supply deficit of around 0.1 million barrels per day in 2017. As long as demand growth does not drop significantly, Crescent Point expects $300 million of free cash flow in 2016 (after paying for its current dividend) and $200 million in 2017.
Crescent Point will have plenty of uses for all this free cash flow (like increasing capex and paying down debt), but a mild dividend hike of 20%, for example, would only take $72 million out of the company’s expected $500 million of free cash flow over the next two years.
With this in mind, as long as oil prices stay fairly stable, it would not be unlikely to see a dividend hike from Crescent Point.
