Peyto Exploration & Development (TSE:PEY) Is Due To Pay A Dividend Of CA$0.11

The board of Peyto Exploration & Development Corp. (TSE:PEY) has announced that it will pay a dividend of CA$0.11 per share on the 13th of September. Based on this payment, the dividend yield on the company's stock will be 9.0%, which is an attractive boost to shareholder returns.

See our latest analysis for Peyto Exploration & Development

Peyto Exploration & Development's Earnings Easily Cover The Distributions

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Before making this announcement, Peyto Exploration & Development was paying out quite a large proportion of both earnings and cash flow, with the dividend being 113% of cash flows. Paying out such a high proportion of cash flows certainly exposes the company to cutting the dividend if cash flows were to reduce.

Looking forward, earnings per share is forecast to rise by 100.8% over the next year. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 40% which brings it into quite a comfortable range.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. The dividend has gone from an annual total of CA$0.96 in 2014 to the most recent total annual payment of CA$1.32. This implies that the company grew its distributions at a yearly rate of about 3.2% over that duration. The dividend has seen some fluctuations in the past, so even though the dividend was raised this year, we should remember that it has been cut in the past.

We Could See Peyto Exploration & Development's Dividend Growing

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. It's encouraging to see that Peyto Exploration & Development has been growing its earnings per share at 7.4% a year over the past five years. The payout ratio is very much on the higher end, which could mean that the growth rate will slow down in the future, and that could flow through to the dividend as well.

An additional note is that the company has been raising capital by issuing stock equal to 12% of shares outstanding in the last 12 months. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

Peyto Exploration & Development's Dividend Doesn't Look Sustainable

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. The track record isn't great, and the payments are a bit high to be considered sustainable. Overall, we don't think this company has the makings of a good income stock.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 3 warning signs for Peyto Exploration & Development that investors should take into consideration. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.