Pembina Pipeline (TSE:PPL) Is Paying Out A Larger Dividend Than Last Year

Pembina Pipeline Corporation (TSE:PPL) will increase its dividend from last year's comparable payment on the 30th of June to CA$0.71. This takes the annual payment to 5.5% of the current stock price, which is about average for the industry.

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Pembina Pipeline's Projected Earnings Seem Likely To Cover Future Distributions

Unless the payments are sustainable, the dividend yield doesn't mean too much. Before this announcement, Pembina Pipeline was paying out 90% of earnings, but a comparatively small 62% of free cash flows. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.

Over the next year, EPS is forecast to expand by 15.0%. Assuming the dividend continues along recent trends, our estimates say the payout ratio could reach 83% - on the higher side, but we wouldn't necessarily say this is unsustainable.

See our latest analysis for Pembina Pipeline

Pembina Pipeline Has A Solid Track Record

The company has an extended history of paying stable dividends. Since 2015, the dividend has gone from CA$1.74 total annually to CA$2.84. This means that it has been growing its distributions at 5.0% per annum over that time. Companies like this can be very valuable over the long term, if the decent rate of growth can be maintained.

Pembina Pipeline May Find It Hard To Grow The Dividend

The company's investors will be pleased to have been receiving dividend income for some time. Earnings has been rising at 3.1% per annum over the last five years, which admittedly is a bit slow. Earnings are not growing quickly at all, and the company is paying out most of its profit as dividends. When the rate of return on reinvestment opportunities falls below a certain minimum level, companies often elect to pay a larger dividend instead. This is why many mature companies often have larger dividend yields.

Our Thoughts On Pembina Pipeline's Dividend

Overall, we always like to see the dividend being raised, but we don't think Pembina Pipeline will make a great income stock. The company is generating plenty of cash, but we still think the dividend is a bit high for comfort. We would probably look elsewhere for an income investment.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 2 warning signs for Pembina Pipeline that investors should know about before committing capital to this stock. Is Pembina Pipeline not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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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.