Is the dividend safe.Since then, the stock has plunged along with oil prices and the shares now yield XX per cent. Do you think the company will cut the dividend?
Whenever a yield gets that high, investors are right to ask about the dividend’s sustainability. However, according to analysts and fund managers I spoke to, Crescent Point is under no immediate pressure to cut its dividend.
MORE RELATED TO THIS STORY
The price of oil would have to fall to less than $55 (U.S.) a barrel – and stay there for six months or so – before the company would even consider a cut, said Bruce Campbell, president of Campbell, Lee & Ross Investment Management, which owns the shares. (Disclosure: I also own the stock personally.)
Given the supply and demand situation and the politics surrounding oil, he said the probability of oil staying at such a depressed level is very low. Longer term, “I think $75 to $85 makes sense. Producers can make money there,” he said. “As somebody once said, what’s the best cure for a low oil price? A low oil price, because demand will grow and supply will shrink.”
An analyst I spoke to gave much the same response. “We would have to see a much lower oil price before they would take a hatchet to that thing,” the analyst said of Crescent Point’s dividend. “We don’t foresee a cut any time in the near term.”
Another reason the dividend is not in jeopardy right now is that, before oil started plunging, Crescent Point locked in prices for some of its future production. As of Oct. 28, the company had hedged 60 per cent of its oil production for the remainder of 2014 and 37 per cent of its production for 2015 at an average price of more than $93 (Canadian) a barrel, with a smaller volume hedged in 2016.
Finally, if the company needs to conserve cash to preserve the dividend, it can always cut back on capital spending, Mr. Campbell said. It’s worth noting that Crescent Point has maintained the same 23-cent monthly dividend since 2008, and oil has had lots of ups and downs in that time. “We’re comfortable holding it. We’re not comfortable going all-in or doubling down or anything. If oil looks like it’s headed below $60 [U.S.] then I probably reserve the right to change my mind,” he said.
“But the panic is subsiding some, so I think the most likely thing is that oil bounces around between $65 and $69 for a while and that means probably stock prices go sideways, too.”
For its part, the company is also trying to soothe investors’ nerves. “This is a great investment opportunity for people to collect a pretty high yield on a low-risk company,” Crescent Point chief executive officer Scott Saxberg told Bloomberg. “Our hedging program keeps our cash flow strong and allows us to maintain our dividend, maintain our capital program and battle through this.”
Given the possibility that we may see interest rate increases in 2015 or 2016, are there any changes you would make in your investments?
Some interest-sensitive sectors will likely get hit if bond yields rise – pipelines, power producers, utilities and real estate investment trusts, for example. But trying to time the market by selling these stocks before they drop and buying them back before they rebound is a mug’s game. As an investor focused on the long term, I plan to hold on and collect the dividends, which should continue growing regardless of what happens with rates.
Keep in mind that we have seen bond yields rise several times in recent years, only to fall back.
That said, it’s always prudent to diversify by owning less interest-sensitive securities as well. For example, I own Procter & Gamble, Johnson & Johnson, McDonald’s, Coca-Cola and several exchange-traded funds that provide exposure to various sectors. Rising rates can signal economic strength, so growth-oriented companies might even benefit in a rising rate environment.