The Canadian stock market has gained 11.03% since November 2023 due to mild bull rallies and moderating inflation. Going into the last week of May 2024, the TSX is up 6.5% year to date, led by the energy sector’s +22.11%. Market analysts believe rate cuts will drive dividend expansion.
A report by S&P Global Market Intelligence Dividend Forecasting (S&P Global MI DF) in January said that regular base dividend payouts would grow by an average of 6% year over year, with more than 50% coming from heavyweight sectors such as banking and energy.
Bank of Nova Scotia and Whitecap Resources (TSX: WCP) are among the top picks for their generous dividend yields. However, most income-focused investors would find the energy stock more appealing for three reasons: lower share price ($10.35 vs. $65.27), higher yield (7.05% vs. 6.5%), and payout frequency (monthly vs. quarterly).
Furthermore, Whitecap is up 19.64% year to date compared to +4.46% for BNS. Whitecap’s current dividend yield is exceedingly higher than the 4.7% industry average. But is the generous payout sustainable? Given the 57.9% payout ratio (BNS is 68.9%), it should be.
Potential earnings on a simple investment
Frequent dividend payments attract more income investors. Besides the steady income streams you can incorporate into your monthly budget, you can reinvest the dividends 12 times a year instead of four for faster principal compounding.
With Whitecap Resources, a $17,025.75 investment (1,645 shares) transforms into a $100.03 monthly passive income. Assuming you don’t collect the dividends but reinvest them, your money will more than double to $34,386.50 in 10 years. The total dividend earnings of $17,360.75 represents a 101.97% money growth through the power of compounding.
Operations
The $6.2 billion oil-weighted growth company operates in northwest Alberta (West division) and central Alberta (East division). Whitecap’s light oil resource base is the foundation for growth, while the portfolio of assets (petroleum and natural gas) delivers predictable cash flows. The low-decline light oil asset base also supports an internally funded business model.
Whitecap’s exploration and production activities focus on the Western Canadian Sedimentary Basin, competing with several companies of various sizes. Identifying, finding, and developing oil and gas reserves at economical costs and marketability of the oil and gas produced are perennial risks.
Other business risks are the demand for oil and gas in North America, commodity prices, and currency exchange rates.
Production and financial highlights
Whitecap had an exceptional first quarter (Q1) of 2024, production-wise, owing to the record average production of 108,210 barrels per day (bbls/d) of light oil and liquids and 368,701 thousand cubic feet per day (mcf/d) of natural gas. Management said it was the most active quarter in the company’s history and expects the divisions to outperform in Q2.
In the three months ended March 31, 2024, total revenues and net income declined 1.7% and 77.2% year over year to $868.3 million and $59.8 million. Nevertheless, the balance sheet remains strong due to the downside price protection. The total dividend payments of $109 million were 24% higher than in Q1 2023.
Buy rating
Management is confident and comfortable about the sustainability of the current monthly dividend despite the constant stress on commodity prices. The commercial operation of the expanded TMX pipeline beginning in May 2024 is a tailwind. Market analysts recommend a buy rating for Whitecap Resources.
