DIVIDEND WE FALL
The oil price crash has caused dividends – one of the surest signs of financial strength – to plummet in the energy sector
>>> From the mid-2000s up to the 2008 financial crisis, energy stocks were dividend superstars. Today, they’re in some (very shallow) uncharted waters. Take Crescent Point Energy. CEO SCOTT SAXBERG told BNN in March that, “Historically, we’ve never cut the dividend – we’ve grown it three times since 2008 and we’re in a very good position financially to maintain that dividend through this year.” Flash forward to August when Saxberg announced that Crescent Point will cut said dividend 57 per cent.
Today, just 38 per cent of the 63 companies on the S&P/TSX Composite energy index have positive free cash flow – down from 43 per cent in 2013 – and by the end of Q2 2015, 23 per cent of them had reduced their dividend. That’s enough to scare away even some of the investors who’ve been determined to hold through the downturn.
Still, dividend cuts aren’t unexpected when oil plunges. And while it makes sense to protect “the long-term value of [shareholders’] investment,” as Siren Fisekci of Canadian Oil Sands said, what if cutting the dividend won’t actually accomplish this? As Alberta Oil magazine recently reported, “Baytex Energy, which eliminated its dividend completely … will only see its debt-to-cash flow ratio drop from 12.6 to 11 at $40 oil – an improvement, certainly, but not one that will have a material impact on the company’s ability to endure low prices.”
While share prices fluctuate with any number of factors, dividends are a relatively unfiltered look at how the economy is directly impacting companies. “We think it was the right decision to protect our balance sheet,” Saxberg said after announcing the cut. “We know prices will return, and we will be well positioned when they do.” In the meantime, however, some investors – particularly those who undertook dividend investing as an alternative to higher-tax GICs and bonds, or who count on them for smaller marginal tax rates than interest and employment income – will up and leave.
“[Cutting the dividend] is just the right decision to protect our balance sheet, and it positions us for when prices turn.”