CIBC NotesEQUITY RESEARCH
November 26, 2024 Industry Update
Dividend Outlook In A Stock Picker’s Market
Dividends Becoming More Important
Our Conclusion
Heading into guidance season, we are detailing the outlook on dividend growth for the companies on our coverage list. With high valuations for the sector compared to historical averages, future returns may rely more heavily on dividends. As of November 26, EV/EBITDA valuations for midstream and
pipeline companies have recovered, with many sitting at the top of the five-
year range (Exhibit 1 bar chart). The valuations are reflecting an improving
outlook for natural gas infrastructure, while rate cuts and tight credit spreads
help with asset sales and deleveraging. We have broken down our coverage
universe by dividend yield and growth rate to further help inform investment
decisions. We see GEI as relatively compelling for dividend and income
investors, and KEY having the most potential to surprise by returning more
capital to shareholders, but it may come from share repurchases.
Key Points
A Steady Pace Of Dividend Increases Remains Likely: The sector has
seen a wave of optimism in natural gas demand spurred by LNG,
electrification, AI/data centres and industrial markets. That said, high
valuations may require investors to rely more on dividends for returns. With
strengthening sector demand, despite weak commodity prices, the underlying fundamentals remain strong and lead to improving long-term earnings visibility. Indeed, many companies have not had this level of visibility to their capital programs in a number of years, and demand is growing. As a result, we expect a steady pace of moderate dividend increases rather than a return to the higher growth rates of the past (Exhibit 2 line chart).
Payout Ratio And Yield Are Closely Tied: Dividend yield alone is a blunt
valuation instrument and not a free lunch. The Exhibit 4 scatterplot shows
the relative link between yield and FFO/sh payout ratio. We use FFO/sh
payout ratio in this analysis to standardize comparability across companies
but note that many companies base their payout policy on different metrics,
like DCF/sh or EPS.
Dividend Yield And Growth: If we were to stratify our coverage list, GEI
stands out with a high yield at ~7% and an expected dividend growth rate of
just under ~5%. The next tier is more akin to a growth-at-a-reasonable-price
proposition and includes most companies, including the large-cap pipes, BIP
and Midstreamers. WMB has the highest growth rate of this group but also
the lowest current yield. ENB and TRP have attractive yields but lower
growth at ~3%, according to our estimates. All three have exposure to
natural gas transmission fundamentals and other uses for their capital. This
tier also includes the midstream companies, KEY, PPL, and ALA, which
have more moderate dividend yields and growth rates. For the last tier, we
do not expect dividend growth for SOBO or SPB in the short term. SPB is
focusing on share repurchases following a recent dividend cut, and SOBO
just initiated its dividend and has a high current yield. TWM and LCFS do not
pay dividends and have been excluded from this analysis.