Whitecap Resources (TSX:WCP) has been making waves in the Canadian energy sector. Most recently the energy stock made headlines from merging with Veren in a massive $15 billion deal.
Yet investors have long loved the energy stock, particularly for income-focused investors looking for high-yield dividend stocks. With a forward dividend yield of approximately 7.8%, it’s no surprise that many are wondering whether Whitecap stock is a smart buy for its dividend potential. But as always, it’s not just about the yield. It’s about sustainability, growth potential, and the company’s overall financial health.
The numbers
Whitecap stock recently reported its fourth-quarter (Q4) 2024 earnings, delivering earnings per share (EPS) of $0.40, surpassing analyst expectations of $0.37. While this might not seem like a huge beat, in the energy sector, where fluctuating oil prices can make revenue unpredictable, consistent performance above estimates is a solid sign. Revenue also showed resilience, with year-over-year growth of 3.1%, reflecting stable demand for Whitecap’s oil and gas production despite market headwinds.
Looking at Whitecap’s past performance, the company has steadily grown its production base through strategic acquisitions and organic expansion. In 2023, Whitecap acquired assets that bolstered its long-term production capacity, positioning itself as a key mid-cap player in the Canadian energy landscape. The energy stock has a reputation for efficiently managing costs while maximizing cash flow — two critical factors for maintaining its dividend. Over the past five years, Whitecap has maintained an average dividend yield of about 6%, demonstrating a strong track record of returning value to shareholders.
Whitecap’s management has been proactive in adapting to changing market conditions. The company has focused on maintaining a strong balance sheet, with a total debt of $1.14 billion and a relatively low debt-to-equity ratio of 19.89%. This suggests that while Whitecap does carry debt, like most energy companies, it isn’t over-leveraged. This is crucial when navigating an industry known for price swings. Additionally, Whitecap has maintained a reasonable return on equity (ROE) of 14.47%, which is a positive sign that the company is using its resources efficiently to generate profits.
More to come
One of the biggest concerns for any high-yield stock is whether the dividend is sustainable. Whitecap’s current payout ratio sits at approximately 53.65%, meaning that just over half of its earnings are going toward dividend payments. This is a reasonable level, especially in a sector known for volatility. However, it does mean that if oil prices were to drop significantly, Whitecap might have to rethink its dividend strategy. Fortunately, the energy stock has built a strong cash position, with $386.1 million in total cash and $1.83 billion in operating cash flow over the past year. This should provide some cushion even in a downturn.
The energy stock itself has seen some price fluctuations over the past year. The news of the merger sent shares downwards by 15% to 52-week lows at around $8 per share as of writing. This could suggest an opportunity for investors who believe in the company’s long-term stability and dividend strength. However, energy stocks are inherently cyclical, and Whitecap’s performance will largely depend on oil prices and broader economic conditions.
Looking ahead, Whitecap has committed to sustaining its dividend and maintaining production levels while exploring strategic growth opportunities. The energy stock’s ability to generate free cash flow remains strong, with $691.8 million in levered free cash flow over the past 12 months. So, Whitecap still has plenty of cash left over to return to shareholders or reinvest in the business.
Bottom line
Ultimately, is Whitecap Resources stock a buy for its 7.8% dividend yield? For investors seeking steady passive income and exposure to Canada’s energy sector, Whitecap offers a compelling opportunity. The energy stock has a strong financial position, a history of maintaining its dividend, and a well-managed balance sheet. Plus, there is more growth to come from the recent merger. However, it’s essential to keep an eye on oil prices and economic conditions, as these will heavily influence Whitecap’s ability to sustain its payouts. As always, investors should consider their risk tolerance and diversification strategy before jumping in.
