Why It Might Not Make Sense To Buy Pembina Pipeline Corporation (TSE:PPL) For Its Upcoming Dividend
It looks like Pembina Pipeline Corporation (TSE:PPL) is about to go ex-dividend in the next three days. Investors can purchase shares before the 22nd of January in order to be eligible for this dividend, which will be paid on the 12th 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$2.52 to shareholders. Looking at the last 12 months of distributions, Pembina Pipeline has a trailing yield of approximately 7.2% on its current stock price of CA$34.88. If you buy this business for its dividend, you should have an idea of whether Pembina Pipeline's dividend is reliable and sustainable. So we need to investigate whether Pembina Pipeline can afford its dividend, and if the dividend could grow.
View our latest analysis for Pembina Pipeline
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Pembina Pipeline distributed an unsustainably high 154% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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 171% 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.
As Pembina Pipeline's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at Pembina Pipeline, with earnings per share up 8.7% on average over the last five years. Earnings per share have been growing comfortably, although unfortunately the company is paying out more of its profits than we're comfortable with over the long term.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Pembina Pipeline has lifted its dividend by approximately 4.9% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
The Bottom Line
Is Pembina Pipeline an attractive dividend stock, or better left on the shelf? Pembina Pipeline is paying out an uncomfortably high percentage of both earnings and cash flow as dividends, although at least earnings per share are growing somewhat. It's not that we think Pembina Pipeline is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Pembina Pipeline. Be aware that Pembina Pipeline is showing 4 warning signs in our investment analysis, and 1 of those is significant...
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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. 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.
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