Should dividend investors be wary of TSX stocks offering sky-high yields? You might be entering a danger zone if you plan to invest in Pine Cliff Energy (TSX: PNE), Gear Energy (TSX:GXE) or Wall Financial (TSX: WFC). The three income companies are enticing prospects, although the payouts might be unsustainable.
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Ultra-cheap energy stocks
Last year, energy was the top-performing sector due to strong demand and elevated oil prices (more than US$100 per barrel). The 2022 TSX30 List featured 14 energy companies whose profits soared and cash flows hit the roof. However, as of this writing, energy is the only primary sector with a year-to-date loss (-6.37%).
Nevertheless, bargain hunters have ultra-cheap but lucrative options in Pine Cliff Energy and Gear Energy. The former trades at $1.42 per share (-12.57% year to date and pays a 9.15% dividend, while you can purchase the latter at $1 to partake in the mouth-watering 12% dividend.
The $499.75 million natural gas and oil company takes pride in its long-life assets with low decline rates and low operational risk. In 2022, net earnings jumped 33.8% to $108.9 million versus 2021.
However, its sensitivity to changes in the business environment, like declining oil prices, was evident in the first quarter (Q1) of 2023. In the three months that ended March 31, 2023, net earnings declined 67.7% year over year to $4.98 million.
Capital plan re-evaluation
The situation of Gear Energy, a $261.6 million oil-focused exploration and production company, is similar to Pine Cliff. Despite the 6.9% year-over-year drop in net income to $74.98 million in 2022, cash flow from operating activities soared 73% to $89.77 million.
But in Q1 2023, net income fell 68% to $1.99 million versus Q1 2022 due to macro commodity price weakness and inflationary pressure. Management re-evaluated its capital plans and will strike a balance between strong capital returns, production & reserve stability, and continued dividends.
Eye-popping yield
Wall Financial, a $649 million real estate company, engages in mixed-use residential and commercial developments in Canada. Interestingly, the stock is up 73.54% year to date, notwithstanding the uncertainties in the housing market. At $20 per share, the dividend yield is an eye-popping 15%.
In 2022, net earnings reached a record $48.2 million, representing a 229.8% increase versus 2021. Management attributes the increase to the sale of an investment property and improved operations at the managed hotels. It adds that revenue and income from rental apartment operations remain stable.
As of February 16, 2023, the dividend per share is $3, although the dividend range in the past five years is between $1 and $3.
My bet
Declining oil prices are headwinds for Pine Cliff and Gear Energy. Besides the impact on earnings, sustaining high dividend payments becomes questionable. The dividend yield of Wall Financial is too good to true, and I want to avoid falling into a dividend trap.
However, if I invest today, I’d bet on Pine Cliff, whose performance is stellar. The small-cap energy stock had a spectacular run in the last 3.01% years, with an overall return of 997.96%. Gear Energy (439.18%) and Wall Financial (11.3%) fails in comparison during the same period.
