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The board of FirstEnergy Corp. (NYSE:FE) has announced that it will pay a dividend of $0.39 per share on the 1st of September. Including this payment, the dividend yield on the stock will be 4.0%, which is a modest boost for shareholders' returns.
See our latest analysis for FirstEnergy
FirstEnergy's Dividend Is Well Covered By Earnings
Even a low dividend yield can be attractive if it is sustained for years on end. Before this announcement, FirstEnergy was paying out 217% of what it was earning, and not generating any free cash flows either. Paying out such a large dividend compared to earnings while also not generating free cash flows is a major warning sign for the sustainability of the dividend as these levels are certainly a bit high.
Analysts expect a massive rise in earnings per share in 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
The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The annual payment during the last 10 years was $2.20 in 2013, and the most recent fiscal year payment was $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.
FirstEnergy Might Find It Hard To Grow Its Dividend
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. FirstEnergy has seen EPS rising for the last five years, at 23% per annum. Strong earnings is nice to see, but unless this can be sustained on minimal reinvestment of profits, we would question whether dividends will follow suit.
FirstEnergy's Dividend Doesn't Look Sustainable
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about FirstEnergy's payments, as there could be some issues with sustaining them into the future. While we generally think the level of distributions are a bit high, we wouldn't rule it out as becoming a good dividend payer in the future as its earnings are growing healthily. We don't think FirstEnergy is a great stock to add to your portfolio if income is your focus.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've identified 3 warning signs for FirstEnergy (2 are 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.