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The board of FirstEnergy Corp. (NYSE:FE) has announced that the dividend on 1st of December will be increased to $0.41, which will be 5.1% higher than last year's payment of $0.39 which covered the same period. This makes the dividend yield about the same as the industry average at 4.6%.
See our latest analysis for FirstEnergy
FirstEnergy's Payment Has Solid Earnings Coverage
We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Before this announcement, FirstEnergy was paying out 195% of what it was earning, and not generating any free cash flows either. This high of a dividend payment could start to put pressure on the balance sheet in the future.
Looking forward, earnings per share is forecast to rise exponentially over the next year. Assuming the dividend continues along recent trends, we estimate that the payout ratio could reach 52%, which is in a comfortable range for us.
Dividend Volatility
Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2013, the dividend has gone from $2.20 total annually to $1.56. Doing the maths, this is a decline of about 3.4% per year. A company that decreases its dividend over time generally isn't what we are looking for.
FirstEnergy's Dividend Might Lack Growth
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. It's encouraging to see that FirstEnergy has been growing its earnings per share at 13% a year over the past five years. While EPS is growing at a decent rate, but future growth could be limited by the amount of earnings being paid out to shareholders.
The Dividend Could Prove To Be Unreliable
Overall, we always like to see the dividend being raised, but we don't think FirstEnergy will make a great income stock. Strong earnings growth means FirstEnergy has the potential to be a good dividend stock in the future, despite the current payments being at elevated levels. Overall, we don't think this company has the makings of a good income stock.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. For example, we've identified 3 warning signs for FirstEnergy (2 are a bit concerning!) that you should be aware of before investing. Is FirstEnergy not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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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.