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Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Pembina Pipeline Corporation (TSE:PPL) is about to trade ex-dividend in the next 4 days. If you purchase the stock on or after the 24th of July, you won't be eligible to receive this dividend, when it is paid on the 15th of August.
Pembina Pipeline's next dividend payment will be CA$0.20 per share. Last year, in total, the company distributed CA$2.28 to shareholders. Calculating the last year's worth of payments shows that Pembina Pipeline has a trailing yield of 4.8% on the current share price of CA$49.51. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.
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 paid out 101% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. 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 117% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.
Cash is slightly more important than profit from a dividend perspective, but given Pembina Pipeline's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. For this reason, we're glad to see Pembina Pipeline's earnings per share have risen 15% per annum over the last five years. It's not encouraging to see Pembina Pipeline paying out basically all of its earnings and cashflow to shareholders. We're glad that earnings are growing rapidly, but we're wary of the company stretching itself financially.
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 4.4% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Pembina Pipeline is keeping back more of its profits to grow the business.
To Sum It Up
Is Pembina Pipeline worth buying for its dividend? While it's nice to see earnings per share growing, we're curious about how Pembina Pipeline intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.