Gibson Energy Inc. (TSE:GEI) will increase its dividend from last year's comparable payment on the 17th of April to CA$0.43. This takes the dividend yield to 8.1%, which shareholders will be pleased with.
See our latest analysis for Gibson Energy
If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, the company was paying out 175% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 66%. Generally, we think cash is more important than accounting measures of profit, so with the cash flows easily covering the dividend, we don't think there is much reason to worry.
Over the next year, EPS is forecast to expand by 83.5%. Assuming the dividend continues along recent trends, we think the payout ratio could reach 100%, which probably can't continue without putting some pressure on the balance sheet.
The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. Since 2015, the annual payment back then was CA$1.20, compared to the most recent full-year payment of CA$1.72. This works out to be a compound annual growth rate (CAGR) of approximately 3.7% a year over that time. Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.
Investors could be attracted to the stock based on the quality of its payment history. Unfortunately things aren't as good as they seem. In the last five years, Gibson Energy's earnings per share has shrunk at approximately 5.2% per annum. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this can turn into a longer term trend.
In summary, while it's always good to see the dividend being raised, we don't think Gibson Energy's payments are rock solid. The company is generating plenty of cash, but we still think the dividend is a bit high for comfort. We don't think Gibson Energy is a great stock to add to your portfolio if income is your focus.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've identified 3 warning signs for Gibson Energy (1 is a bit concerning!) that you should be aware of before investing. Is Gibson Energy not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.