Shopping for dividend stocks? The TSX has some dividend heavyweights paying dividends for decades in the banking, energy, and telecom sectors. Whitecap Resources (TSX: WCP) is a mid-cap oil and gas company involved in the acquisition, development, and production of oil and gas assets in Western Canada. This oil stock gathered attention as it grew its monthly dividend by a whopping 239% between January 2021 and January 2023.
But the macro environment may not be able to support its dividend growth for long. Instead of buying Whitecap at its cyclical peak, I would buy a dividend heavyweight at its dip.
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Why am I bearish on Whitecap Resources?
Oil companies witnessed windfall gains in 2021 as oil prices rebounded after the pandemic and in 2022 when Western countries imposed sanctions on Russian oil. All Canadian oil stocks saw windfall gains as WTI crude price zoomed to US$125 in 2022 before correcting to US$80/barrel. Whitecap passed on some of these gains to shareholders, growing its monthly dividend by 239% between January 2021 and January 2023.
While other oil companies reduced debt, Whitecap increased its long-term debt from $1 billion in 2021 to $1.8 billion in 2022 to fund its acquisitions. The company is looking to pay down debt to $1.3 billion by the end of 2023. At the same time, it plans to increase its dividend by another 26% this year.
All these figures look too good for a mid-cap stock because it is at its cyclical peak with the expectation that WTI crude will remain at US$75/barrel in 2023. The company claims it can sustain its inflated dividends even at a US$50 oil price as it has been buying back stock at an accelerated rate. What concerns me is the company’s cash reserves. It has a $0 cash balance and is using all its cash flow to pay debt and dividends. The oil producer is funding its acquisitions with floating-rate debt.
For every 100 basis point change in interest rates, Whitecap’s interest expense changes by approximately $14.5 million. Plus, it has over $200 million in debt maturing next year. With no cash reserves the only way the company can repay debt is by restructuring the debt. If a recession comes, oil prices could go downhill. If this happens before Whitecap reduces its debt significantly, a dividend cut could be on the cards.
A dividend heavyweight to buy instead of Whitecap Resources
The energy industry is transitioning to renewable energy, which makes oil a declining industry. Whitecap is currently at its peak and is expanding its oil production capacity, which could become a liability when oil prices fall. The gap between rising oil prices and the cost of capital is narrowing, weakening any long-term growth trend.
The main reason behind investing in dividend stocks is to earn passive income for the long term. So, investors want to look for companies that make a compelling case for growing future cash flows. BCE (TSX: BCE) has a compelling case as the 5G revolution is setting the stage for more devices to be connected to the internet. More devices mean more subscriptions, which means more cash flows for BCE. Unlike Whitecap, BCE has $100 million in cash reserves and lower exposure to floating-rate debt.
BCE has been growing its dividend at a stable rate of 5% since 2013 and has been paying dividends since the 1980s. The stock has undergone the 1990s and the 2008 recession without dividend cuts. This consistency is a sign of stability.
The bottom line
The trick to making money in the stock market is to invest in stocks with future growth potential rather than stocks that have already reached their growth potential.
