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Essential Utilities, Inc.'s (NYSE:WTRG) dividend will be increasing from last year's payment of the same period to $0.287 on 1st of September. This will take the dividend yield to an attractive 2.3%, providing a nice boost to shareholder returns.
See our latest analysis for Essential Utilities
Essential Utilities' Payment Has Solid Earnings Coverage
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Essential Utilities' 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.
Over the next year, EPS is forecast to expand by 24.7%. If the dividend continues on this path, the payout ratio could be 54% by next year, which we think can be pretty sustainable going forward.
Essential Utilities Has A Solid Track Record
Even over a long history of paying dividends, the company's distributions have been remarkably stable. Since 2012, the annual payment back then was $0.528, compared to the most recent full-year payment of $1.15. This implies that the company grew its distributions at a yearly rate of about 8.1% over that duration. The dividend has been growing very nicely for a number of years, and has given its shareholders some nice income in their portfolios.
The Dividend Has Growth Potential
The company's investors will be pleased to have been receiving dividend income for some time. Essential Utilities has seen EPS rising for the last five years, at 5.7% per annum. While on an earnings basis, this company looks appealing as an income stock, the cash payout ratio still makes us cautious.
Our Thoughts On Essential Utilities' Dividend
Overall, we always like to see the dividend being raised, but we don't think Essential Utilities will make a great income stock. 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.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Just as an example, we've come across 3 warning signs for Essential Utilities you should be aware of, and 1 of them is a bit concerning. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.