Avangrid, Inc.'s (NYSE:AGR) investors are due to receive a payment of US$0.44 per share on 1st of October. This means the dividend yield will be fairly typical at 3.3%.
View our latest analysis for Avangrid
Avangrid Doesn't Earn Enough To Cover Its Payments
We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Prior to this announcement, Avangrid's dividend was making up a very large proportion of earnings, and the company was also not generating any cash flow to offset this. We think that this practice can make the dividend quite risky in the future.
EPS is set to fall by 13.0% over the next 12 months. If the dividend continues along recent trends, we estimate the payout ratio could reach 101%, which could put the dividend in jeopardy if the company's earnings don't improve.
Avangrid Is Still Building Its Track Record
Even though the company has been paying a consistent dividend for a while, we would like to see a few more years before we feel comfortable relying on it. Since 2016, the first annual payment was US$1.73, compared to the most recent full-year payment of US$1.76. Dividend payments have been growing, but very slowly over the period. Avangrid hasn't been paying a dividend for very long, so we wouldn't get to excited about its record of growth just yet.
The Dividend Has Growth Potential
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. We are encouraged to see that Avangrid has grown earnings per share at 5.6% per year over the past five years. Past earnings growth has been decent, but unless this is one of those rare businesses that can grow without additional capital investment or marketing spend, we'd generally expect the higher payout ratio to limit its future growth prospects.
We'd also point out that Avangrid has issued stock equal to 25% of shares outstanding. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.
Avangrid's Dividend Doesn't Look Sustainable
Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. The payments are bit high to be considered sustainable, and the track record isn't the best. We would probably look elsewhere for an income investment.