Hess Midstream (NYSE: HESM) pays bigger dividend than last year

Hess Midstream LP (NYSE: HESM) will increase its dividend on November 12 to $ 0.51. This will bring the dividend yield up to an attractive 7.6% rate, which will give returns for shareholders a good boost.

Hess Midstream does not earn enough to cover its payments

Impressive dividend yields are good, but it doesn’t matter much if the payouts can’t be sustained. Prior to making the announcement, Hess Midstream was paying a whopping 105% dividend, but that was only 31% of its overall profits. Such a high cash payout ratio could put the dividend under pressure and force the company to reduce it in the future if it were to go through a difficult time.

Over the next year, EPS is expected to increase by 33.2%. Assuming the dividend continues on recent trends, we think the payout ratio could get very high, which probably can’t continue without starting to put some pressure on the balance sheet.

Historic NYSE dividend: HESM October 29, 2021

Hess Midstream does not have a long payment history

The dividend has been fairly stable in hindsight, but the company hasn’t paid any for a very long time. So it’s hard to judge how it would fare throughout a full economic cycle. Since 2017, the dividend has increased from US $ 1.20 to US $ 2.04. This works out to a compound annual growth rate (CAGR) of around 14% per year over that time period. We’re not too excited about the relatively short history of dividend payments, but the dividend is growing at a good pace and we could take a closer look.

The potential for dividend growth is fragile

Investors in the company will be happy to receive dividends for some time. However, things are not that rosy. Over the past three years, it appears that Hess Midstream’s EPS has declined by around 52% per year. A sharp drop in earnings per share isn’t terrible from a dividend standpoint. Even conservative payout ratios can be put under pressure if earnings fall enough. On the bright side, earnings should gain ground over the next year or so, but until that turns into a trend, we wouldn’t feel too comfortable.

Hess Midstream dividend does not seem sustainable

Overall, we still like to see the dividend go up, but we don’t think Hess Midstream will make a great income stock. With no cash flow, it’s hard to see how the business can support the payment of a dividend. Overall, we don’t think this company has the makings of a good income stock.

It is important to note that companies with a consistent dividend policy will generate greater investor confidence than those with an erratic policy. At the same time, there are other factors that our readers should be aware of before investing any capital in a stock. For example, we have selected 2 warning signs for Hess Midstream that investors should consider. If you are a dividend investor, you can also view our curated list of high performing dividend stocks.

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

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