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The board of Avista Corporation (NYSE:AVA) has announced that it will be increasing its dividend on the 15th of March to US$0.44. This will take the annual payment to 3.9% of the stock price, which is above what most companies in the industry pay.
Avista's Payment Has Solid Earnings Coverage
If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, Avista's dividend was making up a very large proportion of earnings, and the company was also not generating any cash flow to offset this. Generally, we think that this would be a risky long term practice.
Looking forward, earnings per share is forecast to fall by 8.3% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could reach 88%, which is definitely on the higher side.
Avista Has A Solid Track Record
Even over a long history of paying dividends, the company's distributions have been remarkably stable. The first annual payment during the last 10 years was US$1.10 in 2012, and the most recent fiscal year payment was US$1.76. This implies that the company grew its distributions at a yearly rate of about 4.8% over that duration. Although we can't deny that the dividend has been remarkably stable in the past, the growth has been pretty muted.
Dividend Growth May Be Hard To Achieve
Investors could be attracted to the stock based on the quality of its payment history. Avista hasn't seen much change in its earnings per share over the last five years. There are exceptions, but limited earnings growth and a high payout ratio can signal that a company has reached maturity. That's fine as far as it goes, but we're less enthusiastic as this often signals that the dividend is likely to grow slower in the future.
In summary, while it's always good to see the dividend being raised, we don't think Avista's payments are rock solid. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. This company is not in the top tier of income providing stocks.
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. Just as an example, we've come across 3 warning signs for Avista you should be aware of, and 1 of them is significant. We have also put together a list of global stocks with a solid dividend.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.