The advice of Pembina Pipeline Company (TSE: PPL) has announced that it will pay a dividend of C $ 0.21 per share on February 15. Based on this payment, the dividend yield on the shares of the company will be 6.4%, which is an attractive increase in returns for shareholders.
Check out our latest review for the Pembina Pipeline
Pembina Pipeline distributions could be difficult to maintain
While it’s great to have a strong dividend yield, we also need to determine if the payout is sustainable. Pembina Pipeline does not generate a profit, but its free cash flow easily covers the dividend, leaving a lot to reinvest in the business. We generally think cash flow is more important than accounting measures of profit, so we’re pretty comfortable with the dividend at this level.
Looking ahead, earnings per share could reach 16.2% next year if the trend of recent years cannot be broken. While this does mean the business will not be profitable, we generally think the cash flow is more important and the current payout ratio is quite healthy, which is reassuring to us.
The Pembina pipeline has a strong track record
Even over a long history of paying dividends, the company’s distributions have been remarkably stable. The dividend went from C $ 1.56 in 2012 to the last annual payment of C $ 2.52. This means that he increased his distributions to 4.9% per annum during that period. Slow, steady dividend growth may not sound so exciting, but dividends have been stable for the past decade, which we think makes a pretty attractive offer.
The dividend has limited growth potential
Investors who have held shares of the company for the past several years will be pleased with the dividend income they have received. However, initial appearances can be deceptive. Earnings per share have fallen 16% over the past five years. Such rapid declines certainly have the potential to restrict dividend payments if the trend continues in the future.
Our thoughts on the Pembina pipeline dividend
Overall, it’s nice to see a consistent dividend payout, but we believe in the longer term the current payout level could be unsustainable. The company generates a lot of cash, but we still think the dividend is a little high for the sake of convenience. We would probably look elsewhere for an income investment.
It is important to note that companies with a consistent dividend policy will generate greater investor confidence than those with an erratic policy. Still, there are a host of other factors that investors need to consider, aside from dividend payments, when analyzing a business. For example, we have identified 2 warning signs for the Pembina pipeline (1 is a concern!) That you should know before investing. If you are a dividend investor, you can also view our organized list of high performing dividend stocks.
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