This week we’re taking a close look at Chesapeake Energy Corporation (NYSE:CHK)'s stock. Earlier this week we published our Fundamental Analysis and Corporate Actions assessment of the company. Today we assess its Dividend Quality. Chesapeake gets two stars from us for its Medium Dividend Quality and one star for its Dividend Quality trend; our overall score for its Dividend Quality is 25. For more on how we compute our Dividend Quality score read here.
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- Over the last twelve months (prior to 2012-09-30), Chesapeake Energy Corporation (NYSE:CHK) paid a medium quality dividend, which represents a yield of 2.1% at the current price.
- Dividend quality trend has not been consistent over the last five years. Dividends were paid during each of these years — of these 3 were medium quality and 2 were low quality.
- The ending cash balance is less than the last full year dividend payment and cannot be relied on to cushion any significant reduction of cash flows in the future.
Company numbers are TTM (trailing twelve months) or latest available. Share price data is previous day’s close unless otherwise stated.
Dividend Yield and Payout
Cash flow coverage of the dividend paid is more relevant than dividend payout.
While traditional dividend analysis focuses on dividend payout from net income, we focus on the cash flow coverage of dividends (paid to the common stock) in order to determine their quality and sustainability. We assess whether dividends are being paid from operating, investing and issuance cash flows or whether the beginning cash balance is needed to make this payment. We make the assumption that cash dividends are paid only after net debt repayments. We consider the cash outflow from share buybacks to be discretionary and thus ignore its impact on cash required to support the dividend policy.
Dividends that are fully covered from operating and investing cash flow net of any cash outflow from debt repayments and net of a decrease in deposits (for banks) are considered to be “high quality”. Those that require an additional net cash inflow from issuance are categorized as “medium quality”. If operating, investing and issuance cash flows are not sufficient to fund the dividend and the beginning cash balance is used, the dividend is referred to as “low quality”.
This last category is most at risk of a dividend cut though we recognize that companies that have a large cash balance could continue to pay dividends even with a “low quality” dividend profile. For all these definitions, we assume the cash outlay for share buybacks is discretionary and can instead be used to support dividends.
Chesapeake Energy Corporation (NYSE:CHK)’s dividend payout is below its peer median.
Over the last twelve months (prior to 2012-09-30), CHK-US’s dividend payout of -24.3% and the corresponding dividend yield of 2.1% (relative to the current price) compare to a peer median level of 15.1% and 0.9% respectively. Relative to its peers, the firm is generating a high dividend yield. However, its dividend payout is negative which suggests a likely downward pressure on the dividend based on this traditional analysis.
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Over the last twelve months (prior to 2012-09-30), CHK-US paid a medium quality dividend.
The source of the company’s cash to support the dividend paid over the last twelve months is operating cash flow (coverage of 10.4x), investing cash flow (coverage of -25.8x), issuance cash flow (coverage of 16.4x) and twelve-month prior cash (coverage of 0.3x), for a total dividend coverage of 1.8x.
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These coverage ratio factors imply that the firm’s net cash inflow from issuance was required (in addition to operating and investment cash) to pay the dividend, which suggests a medium dividend quality. Chesapeake Energy Corporation (NYSE:CHK
)'s dividend quality is not in line with the majority of its peers, which comprise 1 high quality, 3 medium quality and 4 low quality.
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Dividend quality varied between medium and low over the last five years.
CHK-US has paid a dividend in each of its last five years. The distribution of dividend quality over this period consists of 3 medium and 2 low. In particular, the dividends paid in the two most recent years were of medium quality. During this period, the medium quality dividend coverage has remained more or less stable at 2.2x relative to the prior year.
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CHK-US’s dividend has a weak cushion from the ending cash balance.
Though the dividend yield is high relative
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