Pembina Pipeline Corporation (TSE:PPL) stock is about to trade ex-dividend in 4 days time. You will need to purchase shares before the 23rd of January to receive the dividend, which will be paid on the 14th of February.
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$2.40 to shareholders. Calculating the last year's worth of payments shows that Pembina Pipeline has a trailing yield of 5.0% on the current share price of CA$50.42. 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! We need to see whether the dividend is covered by earnings and if it's growing.
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 out more than half (75%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether Pembina Pipeline generated enough free cash flow to afford its dividend. Over the past year it paid out 151% 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.
Pembina Pipeline paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Pembina Pipeline's ability to maintain its dividend.
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. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's comforting to see Pembina Pipeline's earnings have been skyrocketing, up 23% per annum for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past ten years, Pembina Pipeline has increased its dividend at approximately 4.9% a year on average. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.
Is Pembina Pipeline an attractive dividend stock, or better left on the shelf? Earnings per share growth is a positive, and the company's payout ratio looks normal. However, we note Pembina Pipeline paid out a much higher percentage of its free cash flow, which makes us uncomfortable. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Pembina Pipeline's dividend merits.
Curious what other investors think of Pembina Pipeline? See what analysts 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.
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