For a long time, I dismissed dividends as being little more than nice little additions to my portfolio’s cash balance. Then a friend’s grandfather died, and I was allowed to see his portfolio. Years and years of compounded dividends had contributed significantly to the portfolio’s overall returns. That’s when I realized I’d better take dividends — even small ones — very seriously.
Then again, large dividends are even better — but only if they are stable. In the name of full disclosure, my original intention was to discuss how safe Niska Gas Storage Partners’ (NYSE:NKA) dividend is. Then the company reported earnings, and guidance was so shockingly bad that I am now doubting the dividend’s stability. So this has become a great lesson in choosing your dividend stocks carefully.
Niska Gas Storage is the largest independent owner and operator of natural gas storage in North America, with strategically located assets in key natural gas-producing and consuming regions. It owns and operates three facilities storing 148 billion cubic feet (Bcf) in Canada, 35 Bcf in northern California and13 Bcf in Oklahoma. It also contracts 8.5 Bcf of gas storage capacity on the Natural Gas Pipeline Company of America pipeline system.
Apparently, there is a glut of natural gas, and it has dramatically harmed prices. The result is that instead of expecting to report fiscal-year earnings of $27 million to $30 million, Niska now expects $3 million to $13 million. The past quarter wasn’t too bad, but the company warned the supply-demand issues are going to really impact it during the next two quarters.
Niska has 67 million shares and current pays $1.40 annually (or about 11% on today’s stock price), or about $94 million in total dividend payments. The company is down to $26 million on its balance sheet and is selling off some inventories to enhance its liquidity. However, Niska suspended its dividend on subordinated units (the company is organized as an LLC, so there are senior and subordinated units). Indeed, Niska’s cash available for distribution (CAD) is expected to be only $50 million, which the company indicates is about how much the senior units will receive. The question is whether this still will be the case next year.
This situation provides a great lesson for dividend investors. If you see a juicy yield, you must drill down into the company’s financials to see if that dividend is sustainable. I saw the same story unfold earlier this year with World Wrestling Enterprises (NYSE:WWE), which also ended up cutting its dividend.
As of this writing, Lawrence Meyers did not own a position in any of the aforementioned stocks.