The uncertainty surrounding Just Energy Group Inc.'s dividend is dissipating after Canada Pension Plan Investment Board stepped in as a saviour.
The retailer of natural gas and electricity is borrowing $105-million from CPPIB at a coupon of 9.75 per cent, and will pay the money back in five and a half years. Without the emergency funding, no one knew how Just Energy would pay its rich dividend in the near future.
Had CPPIB declined to offer the debt, many people speculated that Just Energy would resort to the high yield market, and no one knew what kind of terms they would get there.
For now, the new cash serves as a bit of a safety net under the shares, which have plummeted about 40 per cent from their 2012 peak. Because the company's dividend is so expensive, investors started to wonder if it would get cut.
However, the new financing doesn't offer much long-term upside. While the company says the money will help fund future growth and allow it to pay down its working capital line – even though the rate on that line is lower, according to CIBC World Markets analyst Kevin Chiang – it's pretty clear the company is borrowing to pay its dividend, which now generates a yield of 13.1 per cent. That's never very promising.
Mr. Chiang also notes that he doesn't believe Just Energy's payout ratio will fall below 100 per cent before 2015. The company may not want to cut its dividend, which pays $1.24 a year, but that means it's going to have to put up with nervous investors who sent the stock on a wild ride over the past two years.
Tim Kiladze