Maximizing your tax-free savings account, or TFSA, contributions is a good first step toward significant savings. Setting one’s TFSA up with high-yield dividend stocks that are reliable, growing, and safe is the next step. A TFSA stock that can do all of that is Peyto Exploration and Development Corp. (TSX: PEY).
Let’s take a look at why Peyto is a solid choice for a dividend stock for your TFSA – and for strong and growing monthly payouts
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Peyto – A company description
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 many years.
Peyto’s assets are top-quality assets. It is these long-life, low-cost assets that have supported and driven Peyto’s strong results over time. Also, Peyto has access to a diversified set of customers and markets, which means higher pricing.
As one of Canada’s significant natural gas producers, Peyto boasts a long history of growing, low-cost production, growing cash flows, and shareholder value creation.
Recent results
Peyto’s recent results once again demonstrated the company’s value. These high-quality results included strong cash flows, earnings, and returns. They also included an 8% dividend hike.Year-to-date, Peyto has increased its dividend by 18%.
Importantly, this dividend is supported by strong macro and company-specific fundamentals, all of which make Peyto a dividend stock that’s ideal for any TFSA.
Production growth at Peyto accelerated in the third quarter, coming in at 10% or 7% on a per share basis. The standout came in liquids production, which increased 20% versus last year. This was driven by strong performance in the liquids-rich Cardium region. Drilling results have been very positive, as Peyto is drilling wells that are 50% longer and at costs that are 11% lower.
Moving on to the financial results, funds from operations increased 11% to $221 million and adjusted earnings per share (EPS) increased 11% to $0.50. In the quarter, Peyto paid down an additional $24 million of debt, bringing its debt-to-trailing earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio to under one.
Why is Peyto a perfect TFSA stock?
Peyto is a natural gas producer. This is a commodity business that’s subject to many factors that are beyond anyone’s control. The most obvious is commodity prices. This can wreak havoc on a company if things are not handled correctly.
The reasons I like Peyto are many. Its low-cost operation has been consistently successful at keeping costs low. In fact, Peyto is one of the lowest-cost natural gas producers in Canada. This gives the company resilience in the hard times and even stronger cash flows in the good times.
Another reason to like Peyto is its successful attempt to mitigate the risks inherent in the natural gas business. Things like diversifying end markets and hedging have brought greater stability and profit to Peyto. In the third quarter, Peyto’s realized natural gas price was $3.50, more than double Canadian natural gas prices. Peyto’s diversification contributed $1.00 and hedging contributed an incremental $0.82.
The bottom line
So, in summary, the results came in above expectations and demonstrated the strength of Peyto’s business model. Consequently, Peyto’s stock price has rallied 5% since the release of these results a few days ago.
