The board of Peyto Exploration & Development Corp. (TSE:PEY) has announced that it will pay a dividend on the 15th of November, with investors receiving CA$0.11 per share. Based on this payment, the dividend yield on the company's stock will be 8.7%, which is an attractive boost to shareholder returns.

Check out our latest analysis for Peyto Exploration & Development

Peyto Exploration & Development's Future Dividend Projections Appear Well Covered By Earnings

A big dividend yield for a few years doesn't mean much if it can't be sustained. 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 114% of cash flows. Paying out such a high proportion of cash flows certainly exposes the company to cutting the dividend if cash flows were to reduce.

Over the next year, EPS is forecast to expand by 62.6%. If the dividend continues along recent trends, we estimate the payout ratio will be 50%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The dividend has gone from an annual total of CA$0.96 in 2014 to the most recent total annual payment of CA$1.32. This works out to be a compound annual growth rate (CAGR) of approximately 3.2% a year over that time. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

Peyto Exploration & Development Could Grow Its Dividend

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Peyto Exploration & Development has seen EPS rising for the last five years, at 7.3% per annum. Past earnings growth has been decent, but unless this is one of those rare businesses that can grow without additional capital investment or marketing spend, we'd generally expect the higher payout ratio to limit its future growth prospects.

We should note that Peyto Exploration & Development has issued stock equal to 12% of shares outstanding. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

The Dividend Could Prove To Be Unreliable

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. The track record isn't great, and the payments are a bit high to be considered sustainable. We don't think Peyto Exploration & Development is a great stock to add to your portfolio if income is your focus.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 3 warning signs for Peyto Exploration & Development that you should be aware of before investing. Is Peyto Exploration & Development not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.