Wednesday, 2 May 2012

Canadian Oil Sands Raises Dividends

At the end of April, Canadian Oil Sands Ltd announced that it will hike its dividends 17% from 30 cents to 35 cents. Sale volumes were low compared to the first quarter of 2011 mainly due to maintenance issues. The company also reported lower and lower net income compared to last year's first quarter.

Here's a quote from Marcel Coutu, President and Chief Executive Officer:

The increase in the dividend to $0.35 per share reflects confidence in our business fundamentals and the commitment to delivering excess cash to our investors," said Marcel Coutu, President and Chief Executive Officer. "Continued strength in oil prices and Syncrude's solid operating base generated strong revenues, resulting in a growing cash balance over the first quarter. Combined with our recent US$700 million debt issuance, we have the liquidity to fund our major capital projects over the next few years while maintaining a strong balance sheet and dividend.
From the highlights of the report, it seemed to me like the company wasn't having a good  quarter relative to last year. While increasing dividends is usually a boon for shareholders and I enjoy getting a raise when I sat around and did nothing, I'm bothered by the quote.

You see, back in March, Canadian Oil Sands Ltd. issued US$700 million in debt so that it could repay $300 million of debt that was maturing. The remaining amount was going to be used for "general corporate purposes". Now issuing $300 million of new debt to pay off $300 million of old debt means you just rolled over the debt. However, by taking extra money, the company has increased its debt obligation. Taking on debt isn't necessarily a bad thing, but borrowing money and then increasing the amount of money you pay out to shareholders doesn't make sense. If the company has to borrow money, then it shouldn't be distributing more money. Remember the company has to eventually repay the debt. instead of using the borrowed cash to grow the company and generate profit so that the debt can be repaid, handing it out will mean the company will be in worse position than before it took on the debt.

I see that as a bit of a red flag, but Canadian Oil Sands Ltd. has shown a willingness to cut dividends when it was necessary and that shows that the company has a long-term mindset. So for now I'll happily take the dividend increase and see where it goes from here.

-the Paperboy

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