Peyto Exploration & Development Corp. (TSE:PEY) will pay a dividend of CA$0.11 on the 13th of June. The dividend yield will be 6.9% based on this payment which is still above the industry average.

Our free stock report includes 2 warning signs investors should be aware of before investing in Peyto Exploration & Development. Read for free now.

Peyto Exploration & Development's Projected Earnings Seem Likely To Cover Future Distributions

If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, Peyto Exploration & Development's dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 104% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.

The next year is set to see EPS grow by 29.7%. If the dividend continues along recent trends, we estimate the payout ratio will be 65%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

See our latest analysis for Peyto Exploration & Development

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The dividend has gone from an annual total of CA$1.20 in 2015 to the most recent total annual payment of CA$1.32. Its dividends have grown at less than 1% per annum over this time frame. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.

Dividend Growth Could Be Constrained

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Peyto Exploration & Development has impressed us by growing EPS at 43% per year over the past five years. However, Peyto Exploration & Development isn't reinvesting a lot back into the business, so we wonder how quickly it will be able to grow in the future.

Peyto Exploration & Development's Dividend Doesn't Look Sustainable

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. Strong earnings growth means Peyto Exploration & Development has the potential to be a good dividend stock in the future, despite the current payments being at elevated levels. We don't think Peyto Exploration & Development is a great stock to add to your portfolio if income is your focus.