Investing in stocks that pay high dividends is an effective way for the conservative investor whose concern is mainly with the preservation of capital. When investing for a high dividend yield, the most important consideration is the sustainability of such dividends. Hence research into the underlying dividend payer is crucial.
Please be advised I’m not making any tacit recommendations. Any investor who is contemplating investing for a high dividend should use these articles a base from which to do further research and in depth analysis.
Husky Energy (HUSKF) is a Canadian-based integrated international energy and energy-related company. The Company conducts its business in three sectors: upstream, midstream and downstream. Upstream includes exploration, development and production of crude oil, natural gas and natural gas liquids. Midstream includes upgrading of heavy crude oil feedstock into synthetic crude oil, marketing of the Company's and other producers’ crude oil, natural gas, natural gas liquids, sulphur and petroleum coke; pipeline transportation, processing of heavy crude oil, storage of crude oil, diluents and natural gas, and co-generation of electrical and thermal energy (infrastructure and marketing). Downstream includes refining of light and heavy crude oil, production of ethanol, and marketing of refined petroleum products, including gasoline, diesel, jet fuel, blending stocks, ethanol-blended fuels, asphalt and the marketing of a range of merchandise.
Through a commitment to creating shareholder value and financial discipline, Husky has maintained a consistent record of strong market and financial performance. Management has a proven track record of executing projects on time and on budget. Husky shareholders receive a best-in-class dividend yield and exposure to an enviable suite of growth projects.
At the current price of $29.51, Husky is offering a dividend yield of 3.95%, or $1.19 per share. Over the past five years, the dividend has grown at a compound annual rate of 7.5%, which is an excellent achievement given the financial crisis of 2008 and low gas prices. Even more remarkable is that the 2009 dividend was down 30% on the 2008 payout ($1.71 compared to $1.19, respectively).
Despite this lower payout which was as the result of a 60% decrease in net income for 2009 caused by a similar decline in revenue. However the current price Husky does look attractive: price to cash flow is 7.6 times, price to book is 1.7 times and price to sales is 1.6 times.
The PE ratio may appear high but in terms of the industry average is actually not, as compared to the industry average which is 22 times. Husky currently trades on a PE ratio of 17.47 times. Using a five year normalized earnings measure, the PE ratio is currently 9.6 times.
The biggest concern with Husky is articulated in the company’s annual report from 2009. It reads, “Companies operating in the upstream oil and gas industry require sufficient cash in order to fund capital programs necessary to maintain and increase production and develop reserves, to acquire strategic oil and gas assets, repay maturing debt and pay dividends. Husky’s upstream capital programs are funded principally by cash provided from operating activities and committed credit facilities. During times of low oil and gas prices, part of a capital program can generally be deferred. However, due to the long cycle times and the importance to future cash flow in maintaining production, it may be necessary to utilize alternative sources of capital to continue the Company’s strategic long-term investment plan during periods of low commodity prices. As a result, Husky frequently evaluates its options with respect to sources of long and short-term capital resources. In addition, from time to time the Company engages in hedging a portion of production to protect cash flow in the event of commodity price declines. Corporate acquisitions, such as the Lima Refinery, are financed by issuing investment grade long-term debt”.
The dividend is thus susceptible to declines in the price of oil and natural gas – something investors need to be acutely aware of it they believe the 4% dividend yield on Husky is sustainable.
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