We Wouldn't Be Too Quick To Buy Pembina Pipeline Corporation (TSE:PPL) Before It Goes Ex-Dividend

By
Simply Wall St
Published
April 16, 2021
TSX:PPL
Source: Shutterstock

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Pembina Pipeline Corporation (TSE:PPL) is about to go ex-dividend in just four days. If you purchase the stock on or after the 22nd of April, you won't be eligible to receive this dividend, when it is paid on the 14th of May.

Pembina Pipeline's next dividend payment will be CA$0.21 per share, on the back of last year when the company paid a total of CA$2.52 to shareholders. Looking at the last 12 months of distributions, Pembina Pipeline has a trailing yield of approximately 6.8% on its current stock price of CA$36.92. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Pembina Pipeline has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Pembina Pipeline

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Pembina Pipeline paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Over the past year it paid out 130% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
TSX:PPL Historic Dividend April 17th 2021

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Pembina Pipeline reported a loss last year, but at least the general trend suggests its income has been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Pembina Pipeline has delivered an average of 4.9% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Remember, you can always get a snapshot of Pembina Pipeline's financial health, by checking our visualisation of its financial health, here.

Final Takeaway

Should investors buy Pembina Pipeline for the upcoming dividend? First, it's not great to see the company paying a dividend despite being loss-making over the last year. Second, the dividend was not well covered by cash flow." Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Although, if you're still interested in Pembina Pipeline and want to know more, you'll find it very useful to know what risks this stock faces. Every company has risks, and we've spotted 3 warning signs for Pembina Pipeline (of which 2 shouldn't be ignored!) you should know about.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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