Why It Might Not Make Sense To Buy Peyto Exploration & Development Corp. (TSE:PEY) For Its Next Dividend

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It looks like Peyto Exploration & Development Corp. (TSE:PEY) is about to go ex-dividend in the next 2 days. This means that investors who purchase shares on or after the 27th of June will not receive the dividend, which will be paid on the 15th of July.

Peyto Exploration & Development's upcoming dividend is CA$0.02 a share, following on from the last 12 months, when the company distributed a total of CA$0.24 per share to shareholders. Looking at the last 12 months of distributions, Peyto Exploration & Development has a trailing yield of approximately 5.9% on its current stock price of CA$4.05. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Peyto Exploration & Development

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year, Peyto Exploration & Development paid out 93% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out more than half (63%) of its free cash flow in the past year, which is within an average range for most companies.

It's good to see that while Peyto Exploration & Development's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

Click this link to see the company's income payout ratio, plus what analysts are forecasting for its future payout ratio.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by Peyto Exploration & Development's 7.6%per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Peyto Exploration & Development has seen its dividend decline 20% per annum on average over the past 8 years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

Final Takeaway

From a dividend perspective, should investors buy or avoid Peyto Exploration & Development? It's never fun to see a company's earnings per share in retreat. Worse, Peyto Exploration & Development's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. It's not that we think Peyto Exploration & Development is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Wondering what the future holds for Peyto Exploration & Development? See what the two analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.