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The board of FirstEnergy Corp. (NYSE:FE) has announced that it will pay a dividend of US$0.39 per share on the 1st of September. Based on this payment, the dividend yield on the company's stock will be 4.1%, which is an attractive boost to shareholder returns.
FirstEnergy's Dividend Is Well Covered By Earnings
A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, FirstEnergy's earnings easily covered the dividend, but free cash flows were negative. No cash flows could definitely make returning cash to shareholders difficult, or at least mean the balance sheet will come under pressure.
The next year is set to see EPS grow by 0.9%. If the dividend continues on this path, the payout ratio could be 64% by next year, which we think can be pretty sustainable going forward.
While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The dividend has gone from US$2.20 in 2011 to the most recent annual payment of US$1.56. The dividend has shrunk at around 3.4% a year during that period. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.
We Could See FirstEnergy's Dividend Growing
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. FirstEnergy has seen EPS rising for the last five years, at 8.4% per annum. The lack of cash flows does make us a bit cautious though, especially when it comes to the future of the dividend.
Our Thoughts On FirstEnergy's Dividend
Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We would be a touch cautious of relying on this stock primarily for the dividend income.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, FirstEnergy has 2 warning signs (and 1 which is significant) we think you should know about. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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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