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An oil pumpjack sits unused in a field north of Edmonton, February 8, 2013. (JASON FRANSON For The Globe and Mail)
An oil pumpjack sits unused in a field north of Edmonton, February 8, 2013. (JASON FRANSON For The Globe and Mail)

Schizas’s Mailbag

Hold this dividend stock, but watch for a trend reversal Add to ...

Hi Lou,

Can you please explain payout ratios? I purchased Arc Resources at $14.02, have always received my dividend but when I look it up I get a payout ratio of 256.75. Does this mean my dividend is not safe?

Thanks,

Bruce

Hey Bruce,

Thanks for the assignment.

This will be my first inspection of the situation that exists at Arc Resources Ltd. The dividend payout ratio is a measure of what percentage of earnings is paid out in dividends. Another method of calculating the dividend payout ratio is to use cash flow instead of earnings. The research conducted on your behalf indicates that your calculation of a payout ratio of 256.75 may be on the high side. If you go to the company’s website you will find their Investor Presentation dated April 7, 2014. On page four there is a chart that seems to indicate that the payout ratio is closer to 35 per cent. You will have to conduct further due diligence as another resource that I found suggests that it could be using the cash flow method of calculating the ratio.

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Here’s what you might want to focus on. You are up substantially on your investment since you bought at $14.02 and need to decide if you want to continue holding ARX in your portfolio. A review of the charts will help identify risks and opportunities associated with this investment.

The three-year chart indicates that you have been enjoying a nice ride since February of 2013 when the shares broke above resistance at $23.00 until they ran to resistance at $28.00. ARX then pulled back to test support along the 200-day moving average before starting another advance in September of 2013. The shares are currently approaching their all-time high near $34.00 so the question is if there is more to come.

The six-month chart demonstrates that the shares have been moving higher in a channel and have just popped above the upper line of resistance. What is evident from the charts is that ARX trades in a sawtooth pattern providing trading opportunities. What the examination has also identified is that the uptrend line and the moving averages have been tested but not breached.

ARX is a hold with a prescription to inspect the chart on a daily basis to ensure that you don’t get caught up in a trend reversal.

Make it a profitable day and happy capitalism!

Have your own question for Lou? Send it in to lou@happycapitalism.com.

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