Ameren Corporation (NYSE:AEE) will increase its dividend on the 31st of March to US$0.59. The announced payment will take the dividend yield to 2.6%, which is in line with the average for the industry.
Ameren's Earnings Easily Cover the Distributions
We aren't too impressed by dividend yields unless they can be sustained over time. Before making this announcement, Ameren was earning enough to cover the dividend, but it wasn't generating any free cash flows. No cash flows could definitely make returning cash to shareholders difficult, or at least mean the balance sheet will come under pressure.
Looking forward, earnings per share is forecast to rise by 5.2% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 58%, which is in the range that makes us comfortable with the sustainability of the dividend.
Ameren Has A Solid Track Record
The company has an extended history of paying stable dividends. The first annual payment during the last 10 years was US$1.54 in 2012, and the most recent fiscal year payment was US$2.36. This works out to be a compound annual growth rate (CAGR) of approximately 4.4% a year over that time. While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is less attractive.
Ameren Could Grow Its Dividend
Investors could be attracted to the stock based on the quality of its payment history. Ameren has seen EPS rising for the last five years, at 7.4% per annum. While on an earnings basis, this company looks appealing as an income stock, the cash payout ratio still makes us cautious.
Overall, we always like to see the dividend being raised, but we don't think Ameren will make a great income stock. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. This company is not in the top tier of income providing stocks.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've identified 2 warning signs for Ameren (1 shouldn't be ignored!) that you should be aware of before investing. Is Ameren not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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