Hess Midstream LP (NYSE:HESM) will increase its dividend on the 13th of August to US$0.50. This will take the dividend yield to an attractive 7.1%, providing a nice boost to shareholder returns.
Hess Midstream Is Paying Out More Than It Is Earning
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Based on the last payment, the company wasn't making enough to cover what it was paying to shareholders. Without profits and cash flows increasing, it would be difficult for the company to continue paying the dividend at this level.
The next 12 months is set to see EPS grow by 14.5%. Assuming the dividend continues along recent trends, we think the payout ratio could reach 121%, which probably can't continue putting some pressure on the balance sheet.
Hess Midstream Doesn't Have A Long Payment History
The dividend has been pretty stable looking back, but the company hasn't been paying one for very long. This makes it tough to judge how it would fare through a full economic cycle. The first annual payment during the last 4 years was US$1.20 in 2017, and the most recent fiscal year payment was US$2.02. This works out to be a compound annual growth rate (CAGR) of approximately 14% a year over that time. The dividend has been growing rapidly, however with such a short payment history we can't know for sure if payment can continue to grow over the long term, so caution may be warranted.
Hess Midstream's Dividend Might Lack Growth
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. It's encouraging to see Hess Midstream has been growing its earnings per share at 11% a year over the past three years. However, the company isn't reinvesting a lot back into the business, so we would expect the growth rate to slow down somewhat in the future.
Hess Midstream's Dividend Doesn't Look Sustainable
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. In general, the distributions are a little bit higher than we would like, but we can't ignore the fact the quickly growing earnings gives this stock great potential in the future. We don't think Hess Midstream is a great stock to add to your portfolio if income is your focus.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've identified 4 warning signs for Hess Midstream (1 is concerning!) that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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