American States Water Company (NYSE:AWR) has announced that it will be increasing its dividend on the 1st of September to US$0.36. Based on the announced payment, the dividend yield for the company will be 1.5%, which is fairly typical for the industry.
American States Water's Earnings Easily Cover the Distributions
We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. Prior to this announcement, American States Water's earnings easily covered the dividend, but free cash flows were negative. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.
EPS is set to fall by 0.2% over the next 12 months. Assuming the dividend continues along recent trends, we believe the payout ratio could be 59%, which we are pretty comfortable with and we think is feasible on an earnings basis.
American States Water Has A Solid Track Record
Even over a long history of paying dividends, the company's distributions have been remarkably stable. Since 2011, the dividend has gone from US$0.52 to US$1.46. This implies that the company grew its distributions at a yearly rate of about 11% over that duration. We can see that payments have shown some very nice upward momentum without faltering, which provides some reassurance that future payments will also be reliable.
We Could See American States Water's Dividend Growing
Investors could be attracted to the stock based on the quality of its payment history. It's encouraging to see American States Water has been growing its earnings per share at 9.2% a year over the past five years. The lack of cash flows does make us a bit cautious though, especially when it comes to the future of the dividend.
Overall, we always like to see the dividend being raised, but we don't think American States Water will make a great income stock. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We don't think American States Water is a great stock to add to your portfolio if income is your focus.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 1 warning sign for American States Water that investors should take into consideration. We have also put together a list of global stocks with a solid 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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