Dividend-growth stocks can make all the difference for investors who are looking to set themselves up in retirement or to supplement their employment income during their working years. Safe dividend-growth stocks focus on a few key factors — operational excellence, financial prudence, and a forward-looking strategy.
As you’ll see in this article, Peyto Exploration and Development (TSX: PEY) has successfully implemented these strategies and is a safe, albeit undervalued, Canadian dividend growth stock. One that’s worth buying today and holding for the long term.
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Peyto: Strong execution makes all the difference
Peyto is an explorer and producer of unconventional natural gas in Alberta’s Deep Basin, with a 27-year history as a publicly traded company. This type of natural gas is more difficult to extract, and it requires advanced production methods, something that Peyto has honed and improved upon over the last few years.
Today, Peyto stands out as one of Canada’s largest natural gas producers, with the lowest costs, strong risk management, and an annual dividend per share that has grown 450% since 2020 to the current $1.32. That’s equivalent to a compound annual growth rate (CAGR) of 33%. In Peyto’s most recent quarter, the company increased its dividend 9%. And this dividend-growth stock is backed by strong returns.
All of this has translated into strong long-term returns, with an average return on capital employed (ROCE) of 17% and return on equity (ROE) of 24% over the last 27 years. This is not an easy thing to accomplish in the volatile natural gas industry, and it’s a testament to what Peyto has achieved.
Strong tailwinds support future long-term growth
The current natural gas environment is positive. While Canadian natural gas prices remain depressed, the industry is being positively impacted by a few factors. This includes rapidly growing liquified natural gas (LNG) demand, and rising domestic natural gas demand from utilities, industrial customers, and data centres.
This has impacted Peyto stock favourably, as demonstrated in the company’s latest quarterly results. But Peyto’s record results would not have been possible without Peyto’s hedging and diversification strategies, which enabled the company to post an average realized natural gas price of $4.69 per million cubic feet (mcf). This price was an impressive 73% higher than Canadian natural gas prices.
Peyto’s Q1 in more detail
Peyto’s first quarter of 2026 was one that broke records on production, earnings, and cash flow. Production increased 10%, earnings per share (EPS) increased 44% to $0.82, and funds from operations increased significantly to $293 million.
Finally, Peyto continues to operate at the lowest costs in the industry, reducing its cash costs once again in the quarter. A 10% reduction in costs to $1.28 was due to lower interest costs as Peyto continues to reduce its debt.
Attractive valuation
Peyto stock’s strong long-term results and opportunities are, in my view, deserving of higher multiples. Yet, Peyto’s stock remains undervalued, trading at a mere 1.8 times book value and 6.3 times cash flow.
Looking ahead, we can expect Peyto stock to continue to benefit from its company-specific strategy, which has allowed the company to achieve higher realized pricing for its natural gas. Also, as Canada’s natural gas prices increase, as they are expected to with the increased demand from LNG Canada, Peyto will be in an even better position to ramp up its dividend growth and shareholder returns.
The bottom line
Investors looking for long-term dividend growth should consider Peyto stock, an undervalued dividend-growth stock that continues to benefit from building momentum in the natural gas industry.
