Dividend Analysis - Petro-Canada (TSE:PCA)
19 October 2007Dividends Matter reader Debu has requested that we have a look at Petro-Canada. This stock trades on the TSE under the symbol PCA and on the NYSE under the symbol PCZ. I hear many talking heads on TV mention that PCA is one of the better oil plays in Canada as it has not experienced the same run up as its peers.
So let us have a look and see if we should include this company in our portfolio of superior dividend yielding stocks.
Company Profile:
From the company website
Petro-Canada is one of Canada’s largest oil and gas companies, operating in both the upstream and the downstream sectors of the industry in Canada and internationally. We create value by responsibly developing energy resources and providing world class petroleum products and services.
Market capitalization is $26.228B.
Company Fundamentals:
I was only able to dig up 5 years worth of return on invested capital (ROIC) data. Management has delivered fairly consistently over the years with an ROIC ranging from 11.5% to 16.8%. The 5 year average ROIC is 14%.
Return on equity (ROE) has definitely improved over the 10 year period. In fact, the first 3 years did not return a decent ROE with results of 7.81%, 3.52% and 5.72% respectively. However, the 10 year average ROE is still decent at 14.62%. And the 5 year average ROE (not hampered by those initial 3 years) comes in at 18.38%.
Equity growth rate has remained relatively consistent. The 9 year rate is 14.17%. The 5 year rate increases to 17.31%. The 3 year rate drops back to 12.67% and last year’s rate settles back to 13.94%.
Earnings per share growth rate has been declining however. The 9 year rate comes in at a whopping 32.48%. The 5 year rate drops down to a respectable 17.03%. The 3 year rate plunges to 4.54%. And last year’s rate came in at 11.18%. The EPS growth rates have been very volatile ranging from -54.87% to +290.7%!
Sales growth rates have remained fairly flat. The 9 year rate is 16.02%. The 5 year rate nudges up to 18.2%. The 3 year rate holds steady at 16.1%. And last year’s rate dropped to 7.54%. Considering the steady rise of the price of oil, I would have expected sales growth rates to be higher.
Dividend Fundamentals:
The current dividend yield is 0.98%. That is definitely a below average yield when you compare it to the 2.36% dividend yield of the S&P/TSX Composite Index.
Normally, with a low dividend yield like this, we would be looking for some extraordinary dividend growth rates. But in this case, the dividend growth rates have been as volatile as the EPS growth rates! There were 3 years with no dividend increases at all. That was then followed by a 50% increase in the dividend! This volatility makes it difficult to make an educated guess as to the future dividend growth rate.
On a good note, the dividend payout ratio is very low. Back in 1998, the dividend payout ratio hit 62.75%. Since 2000, the dividend payout ratio has consistently hovered around the 11% mark.
Cash flow growth rates have been on the decline. The 9 year rate is 22.7%. The 5 year rate drops to 16.83%. The 3 year rate gets crushed at 1.32%. And last year’s rate rebounded to 13.37%.
Valuation Models:
Let’s use our 3 valuation techniques to find a fair price for this stock.
For the average high dividend yield model, we have to analyze the last 10 years worth of average high dividend yields. You can see that the dividend yield has always been quite low on this stock. The 10 year average high dividend yield is 1.46%. The 5 year average high dividend yield is lower at 1.06%. If we demand the 5 year yield, then the model price works out to $49.06. At the current price of $53.15, Mr. Market is demanding a premium of 8.34%.
Benjamin Graham would be reasonably happy with that estimate. The Graham number works out to $47.85 or a premium of 11.07%.
Using my discounted present value method, I used the following inputs:
- future EPS growth rate of 11% (My initial estimate was 14.17% as taken from the equity growth rates. However, the analysts are more conservative at 11%.)
- future P/E of 10.96 (This is the current P/E and is inline with the 5 year average P/E of 11.3.)
- dividend yield of 1.06% (The 5 year average high dividend yield.)
- future dividend growth rate of 11.16% (This was definitely a tough one due to the volatility of the growth rate but I went with the 9 year dividend growth rate.)
With this information, my model price worked out to $43.63 or a premium of 21.82%.
Here is my dividend analysis of PCA.
Here is the 1 year stock price chart:
Conclusion:
With the price of oil touching $89, finding companies in the oil industry would be a good hedge for investors.
The company fundamentals are consistent enough (except for the EPS growth rates). The inconsistency in the dividend growth rates is a concern. Three years without an increase is not what I typically look for in a dividend payer. I want to get a raise EVERY year!
In any event, all 3 models agree that this stock is currently a bit pricey and would recommend a pullback into the $48 range.
I am ambivalent about this stock. I think I need to look at a few other players in the energy sector and see how they compare before I would consider this stock for my portfolio.
So for now, I will not be adding PCA to my portfolio of superior dividend yielding stocks.
Full Disclosure: I do not own shares in PCA.
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on October 30th, 2007 at 12:40 pm
Hey AJ, where are you…missing your posts! I hope the fitness thing is going well.
I’ll keep checking in for new posts…