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Pengrowth - The Dividend Cut Is Not As Bad As It Seems

PGH slashes its dividend 83%.

The new dividend will be $0.01 per quarter, down from $0.02 per month ($0.04 versus $0.24 annually).

This cut has to do more with the long-term than anything short-term.

PGH is actually generating very healthy levels of cash flows.

However, the company is preparing for a $40 per bbl oil future.

(All numbers are in Canadian dollars)

The news out of Pengrowth Energy (NYSE:PGH) confirms what many have been fearing for months. The company has announced plans to lower its dividend to $0.01 per share per quarter ($0.04 per share annually), down 83% compared to the prior dividend of $0.02 per month ($0.24 per share annually). This new dividend will result in the yield on the common stock dropping to 2.5%, versus the previous 15% yield. Pengrowth is also scrapping its Dividend Reinvestment and Optional Common Share Purchase Plan "DRIP".

Why did Pengrowth cut the dividend?

Based solely on its operating numbers, Pengrowth did not appear to need a cut in the dividend. Funds flow from operations, or FFO, a key metric for Canadian E&Ps for cash flows, came in at $111.5M in Q2 2015, or $0.21 per share. In Q1 2015, FFO came in at $113.0M, o $0.21 per share.

In other words, for the first two quarters of the year, Pengrowth generated $0.42 per share of FFO versus six monthly dividend payments totaling $0.12 per share, resulting in a modest payout ratio of just 29%.

Including capital spending, Pengrowth spent $50.8M in Q2 on capex and $30.8M for the dividend, resulting in cash outlays of ~$81.6M, or 73% of FFO, and ~$30M in free cash...


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