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Why It Might Not Make Sense To Buy Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE:HASI) For Its Upcoming Dividend

Simply Wall St

It looks like Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE:HASI) is about to go ex-dividend in the next 3 days. You will need to purchase shares before the 2nd of October to receive the dividend, which will be paid on the 10th of October.

Hannon Armstrong Sustainable Infrastructure Capital's next dividend payment will be US$0.3 per share, and in the last 12 months, the company paid a total of US$1.3 per share. Based on the last year's worth of payments, Hannon Armstrong Sustainable Infrastructure Capital stock has a trailing yield of around 4.6% on the current share price of $29.1. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! As a result, readers should always check whether Hannon Armstrong Sustainable Infrastructure Capital has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Hannon Armstrong Sustainable Infrastructure Capital

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Hannon Armstrong Sustainable Infrastructure Capital paid out 154% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. It's not unusual to see REITs distributing all of their income to shareholders. Yet a payout ratio this high we feel is still cause for concern as it suggests the dividend is being funded from cash on the balance sheet, or by borrowing. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Hannon Armstrong Sustainable Infrastructure Capital paid out more free cash flow than it generated - 120%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

As Hannon Armstrong Sustainable Infrastructure Capital's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

NYSE:HASI Historical Dividend Yield, September 28th 2019

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. It's encouraging to see Hannon Armstrong Sustainable Infrastructure Capital has grown its earnings rapidly, up 35% a year for the past five years. Earnings per share are increasing at a rapid rate, but the company is paying out more than we think is sustainable, based on current earnings. Companies that pay out more than they earned while growing rapidly, can find themselves short of cash in a few years when growth slows.

We'd also point out that Hannon Armstrong Sustainable Infrastructure Capital issued a meaningful number of new shares in the past year. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Hannon Armstrong Sustainable Infrastructure Capital has delivered an average of 33% per year annual increase in its dividend, based on the past six years of dividend payments. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

The Bottom Line

Has Hannon Armstrong Sustainable Infrastructure Capital got what it takes to maintain its dividend payments? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Wondering what the future holds for Hannon Armstrong Sustainable Infrastructure Capital? See what the eight analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.