Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that AGL Energy Limited (ASX:AGL) is about to go ex-dividend in just 4 days. Investors can purchase shares before the 26th of August in order to be eligible for this dividend, which will be paid on the 25th of September.
AGL Energy's next dividend payment will be AU$0.51 per share, on the back of last year when the company paid a total of AU$0.98 to shareholders. Calculating the last year's worth of payments shows that AGL Energy has a trailing yield of 6.3% on the current share price of A$15.49. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. AGL Energy paid out more than half (62%) of its earnings last year, which is a regular payout ratio for most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out more than half (51%) of its free cash flow in the past year, which is within an average range for most companies.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's comforting to see AGL Energy's earnings have been skyrocketing, up 37% per annum for the past five years. The current payout ratio suggests a good balance between rewarding shareholders with dividends, and reinvesting in growth. With a reasonable payout ratio, profits being reinvested, and some earnings growth, AGL Energy could have strong prospects for future increases to the dividend.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. AGL Energy has delivered 5.2% dividend growth per year on average over the past 10 years. Earnings per share have been growing much quicker than dividends, potentially because AGL Energy is keeping back more of its profits to grow the business.
From a dividend perspective, should investors buy or avoid AGL Energy? Higher earnings per share generally lead to higher dividends from dividend-paying stocks over the long run. That's why we're glad to see AGL Energy's earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow - 62% and 51% respectively. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of AGL Energy's dividend merits.
So while AGL Energy looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Every company has risks, and we've spotted 2 warning signs for AGL Energy (of which 1 shouldn't be ignored!) you should know about.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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