Can Investors Count on Crescent Point Energy Corp.’s 8.5% Dividend Yield?

Once you delve a little under the surface, Crescent Point Energy Corp.’s (TSX:CPG)(NYSE:CPG) dividend doesn’t look so attractive.

| More on:
The Motley Fool

Over the last six months, dozens of Canada’s oil producers cut their dividends.

One notable exception is Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) and its current 8.5% yield. When oil slid beneath $50 per barrel, pundits everywhere thought the company would be the next to chop its payout, especially considering how generous it is. Sure, management did have the advantage of hedging approximately 50% of its 2015 oil production at prices north of $90 per barrel, but it still hurts to sell the other half at $50 per barrel.

Plus, the fact is that the company hasn’t had the free cash flow to support the dividend for years, even during times when oil traded above $100 per barrel. And that’s even after offering investors a 5% discount to take their dividends in the form of additional shares instead of cold, hard cash.

What does 2015 look like? Will the company be able to continue paying shareholders $0.23 per share each month? Let’s take a closer look.

Cash from operations

Many of Canada’s large oil producers gave investors a detailed prediction of what expected results might be for 2015. Crescent Point’s numbers were a little light, so we’ll have to fill in a few ourselves.

In the fourth quarter of 2014 the company averaged $65 per barrel of oil sold, partially weighed down by its natural gas production. Considering the hedging in place, I think it’s safe to assume it can maintain that average price in 2015. Production was around 150,000 barrels per day.

The company generated $572 million in funds flow in the quarter, which we’ll round down a little to $2 billion for the year. We want to be conservative when doing stress tests like this one. Included in the 2014 fourth-quarter numbers was the company’s projected capital expenditures for 2015, which came in at $1.45 billion.

That leaves a projected free cash flow of $550 million, or about $1.20 per share. Compare that with the dividend of $2.76 per share, and we have a problem. Even with the hedging program in place, Crescent Point continues to be in a position where it can’t afford the dividend.

The bright side

The good news for investors is this isn’t a big deal, at least for the rest of 2015.

Crescent Point has approximately 450 million shares outstanding, and 30% of shareholders elect to take advantage of the 5% discount to get more shares instead of a cash dividend. Which means that the company will have to pay out $870 million in cash in 2015, give or take a few bucks.

Remember, free cash flow is $550 million, which means the shortfall is more like $320 million. We’re still talking about a gap of $0.71 per share, but it’s a whole lot better than the $1.56 per share gap.

For a company the size of Crescent Point, borrowing $320 million to pay the dividend isn’t the end of the world. It has $2.3 billion available on its credit line, after negotiating with lenders to give it an additional $1 billion in borrowing power. Based on that, I’m pretty confident in assuming that the 2015 dividend is safe.

But here’s where it gets tricky. It’s generally not a good idea to count on any dividend in the long-term from a company that has to borrow to make the payments. As we’ve all seen countless times, credit has a habit of drying up right when a company needs it most. I’m not saying that’s about to happen to Crescent Point, but the fact remains that a borrowed dividend is far less secure than one covered by free cash flow.

If oil recovers by the end of the year and the company can average $75 or $80 per barrel of crude produced, Crescent Point should have a truly sustainable dividend for the first time in years. But until it happens investors have to be concerned about the viability of the payout. Crescent Point is just too dependent on oil’s recovery to make it a really dependable dividend.

Should you invest $1,000 in Pulse Seismic Inc. right now?

Before you buy stock in Pulse Seismic Inc., consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Pulse Seismic Inc. wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $21,345.77!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 24 percentage points since 2013*.

See the Top Stocks * Returns as of 4/21/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

How I’d Invest $7,000 in My TFSA for $660 in Tax-Free Annual Income

Canadians looking for ways to make the most of the new TFSA contribution room should consider investing in these two…

Read more »

Doctor talking to a patient in the corridor of a hospital.
Dividend Stocks

This Dividend King Paying 7.5% in Monthly Income Is a Must-Have

This high-yield TSX stock might not be a textbook Dividend King, but its reliable monthly payouts and improving financials make…

Read more »

path road success business
Dividend Stocks

How to Invest $50,000 of Tax-Free Cash as Canada-US Trade Uncertainty Escalates

Few Canadian stocks are as easy a choice as this one, making it perfect during volatile periods.

Read more »

monthly desk calendar
Dividend Stocks

How I’d Generate $200 in Monthly Income With a $7,000 Investment

Want to establish $200 in monthly income (or even more?) Here's an easy way to start today that will provide…

Read more »

Printing canadian dollar bills on a print machine
Dividend Stocks

Got $25,000? Turn it Into $250,000 in a TFSA as the Canadian Dollar Rises

Investing doesn't have to be risky or difficult, especially with this top stock.

Read more »

A woman shops in a grocery store while pushing a stroller with a child
Dividend Stocks

Where Will Loblaw Be in 3 Years?

Loblaw (TSX:L) stock could be a stellar performer as tariffs and headwinds move in on Canada's economy.

Read more »

customer uses bank ATM
Dividend Stocks

Where Will National Bank Be in 5 Years?

National Bank of Canada (TSX:NA) stock still looks like a great deal at these levels.

Read more »

A worker overlooks an oil refinery plant.
Dividend Stocks

The Smartest Industrial Stock to Buy With $3,000 Right Now

Aecon is a value stock that's benefiting from strong infrastructure spending today and in the years to come.

Read more »