With a dividend yield of 10.7%, is it time to buy?
Peyto is one of Canada’s leading natural gas producers, with a solid history of operational excellence and dividend growth. It is not often that we come across a quality stock with a dividend yield above 10%. Yet this is what we have found in Peyto Exploration & Development (TSX:PEY). Peyto is one of Canada’s lowest cost natural gas producers and today Peyto shares are yielding 10.7 percent.
Let’s examine whether now is a good time to buy Peyto shares (PEY) for exposure to this very generous dividend yield.
Peyto: A bet on long-term natural gas prices
With a market capitalization of $2.4 billion and production approaching 125,000 barrels of oil equivalent per day (boe), Peyto is a key player in the Canadian natural gas market. Peyto’s share price has been volatile over the years, as natural gas prices have fluctuated. However, economic performance has been strong.
The company has a history of operational excellence that has given it resilience. This has been made possible in part by Peyton’s high-quality assets, which are located in one of Canada’s most productive basins, the Alberta Deep Basin. It is a pool characterized by a high yield profile, with high recovery and predictability.
At this point, natural gas prices have settled much lower than last year’s levels. This is due to mild weather and record storage levels. On the bright side, liquefied natural gas, or LNG, is a secular driver of natural gas prices.
The LNG market has been booming recently as many regions of the world are looking for ways to meet their energy needs. This has given rise to a large LNG market for natural gas in North America. Realized prices on the LNG market are higher than North American prices.
For Peyto, this is obviously a good thing. LNG Canada is likely to be operational by 2025, giving Peyto good access to the lucrative LNG market.
PEY stock’s dividend yield well supported
Despite the long-term bullish trends, the PEY has been weak recently. In fact, it has decreased by 18% in the last month. Nevertheless, the company continues to report strong results.
In the first nine months of the year, cash flow from operations was 470 million dollars. Peyto also delivered an operating margin of 69 percent, a profit margin of 25 percent and a return on capital employed of 12 percent. Finally, the dividend per share increased by 122% compared to last year. Since 2019, Peyton’s dividend has increased by 450%. This is a reflection of the company’s strong cash flows during this period.
Going forward, Peyto has hedged a significant portion of its production volume over the next two years – 68 percent of 2024 volume and 56 percent of 2025 volume is hedged at a gas price of approximately $4 per thousand cubic feet (mcf). Peyton’s cash costs currently stand at $1.05 per mcf. This gives us a bit more certainty in terms of cash flows and results.
Dividend cover
Peyton’s dividend is currently higher than its net profit, meaning the payout ratio is over 100%. More importantly, however, Peyto’s cash flows cover the dividends. In fact, its cash from operations of $470 million easily covered the $175 million dividend in the first nine months of the year.
This, along with Peyton’s growing production, strong hedging position and the expected start of LNG Canada in 2025, gives me comfort that Peyton’s dividend is likely safe.
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