If you’ve checked out Paramount Resources (TSX:POU) on various financial data platforms over the years, you might have seen the stock’s dividend yield reported as being as high as 19%. The current dividend rate ($0.05) actually only produces about a 3% yield; however, the stock has been known to occasionally make “special” payouts that have pushed the yield considerably higher. This year, the stock paid out $1.50 in regular dividends plus a $3 special dividend, which took the overall yield to 22% (using today’s share price). If those same payouts recurred today, they would produce a 22% dividend yield.
There is no guarantee that Paramount Resources will return to paying high dividends in the future. In fact, the future yield will likely be lower than the past yield. However, POU’s volatile dividend history makes for a great case study in how dividend yields are not always what they seem to be. In this article, I will explore Paramount Resources’ dividend history and its future dividend potential, and use my findings as a case study about the importance of scrutinizing dividend yields when analyzing stocks.
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Current payout
Paramount Resources’ most recent dividend payout was $0.05. It was at this level for most of this year; however, there are two things to note here:
- Paramount Resources sometimes pays special dividends. The $3 per share special dividend would take POU’s yield to 22% if it were to recur indefinitely and the stock price didn’t change. The $12 return of capital that occurred around the same time – if counted as a dividend – would take the yield to well over 50%!
- In general, Paramount Resources’ dividend has tended to be volatile, with the regular monthly payout ranging between $0.05 and $0.15 over the last few years.
A note on returns of capital is in order here.
When a company returns capital to investors, that comes out of book value, not the company’s recurring earnings. Accordingly, it should cause the stock price to go down quite a bit if it’s a large return of capital. That’s exactly what we saw this year. So, as far as the extremely high estimates of Paramount Resources’ dividend go: no, those are not accurate.
Dividend sustainability
Having looked at what Paramount Resources has been paying in dividends, it’s time to explore the sustainability of the dividend.
In the trailing 12-month period, POU shares collectively paid out $189.5 million in dividends. In that period, the company earned $-246 million in free cash flow and $1.4 billion in profit. We therefore see a mixed picture on dividend sustainability, with the earnings-based payout ratio being very low, but the FCF payout ratio being negative.
Future potential
Since POU is paying out more in dividends than it brings in in FCF, the question of its dividend sustainability really depends on its future potential. A full analysis of the company’s prospects is beyond the scope of this article. However, as an oil exploration and production (E&P) company, the company’s future results are likely to be volatile, varying with the price of oil. Investors may do well long term, but are likely to see the dividend fluctuate. The volatility will probably be considerable.
Foolish takeaway on Paramount Resources
After reviewing everything considered in this article, I think Paramount Resources’ “true” dividend yield is 3%, not 20%. The apparently high trailing yield is because of non-recurring special dividends in the trailing 12-month period. Future payouts will likely be less than past ones.
