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FirstEnergy Corp.'s (NYSE:FE) periodic dividend will be increasing on the 1st of June to $0.445, with investors receiving 4.7% more than last year's $0.425. Based on this payment, the dividend yield for the company will be 4.3%, which is fairly typical for the industry.
FirstEnergy's Payment Could Potentially Have Solid Earnings Coverage
While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. Before this announcement, FirstEnergy was paying out 99% 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 any free cash flow would definitely be difficult to keep up.
Over the next year, EPS is forecast to expand by 70.9%. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 60% which brings it into quite a comfortable range.
Check out our latest analysis for FirstEnergy
FirstEnergy Has A Solid Track Record
The company has a sustained record of paying dividends with very little fluctuation. Since 2015, the dividend has gone from $1.44 total annually to $1.70. This works out to be a compound annual growth rate (CAGR) of approximately 1.7% a year over that time. Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.
The Dividend's Growth Prospects Are Limited
Investors could be attracted to the stock based on the quality of its payment history. However, FirstEnergy's EPS was effectively flat over the past five years, which could stop the company from paying more every year. The company is paying out a lot of its profits, even though it is growing those profits pretty slowly. Limited recent earnings growth and a high payout ratio makes it hard for us to envision strong future dividend growth, unless the company should have substantial pricing power or some form of competitive advantage.
FirstEnergy's Dividend Doesn't Look Sustainable
In summary, while it's always good to see the dividend being raised, we don't think FirstEnergy's payments are rock solid. Although they have been consistent in the past, we think the payments are a little high to be sustained. We would be a touch cautious of relying on this stock primarily for the dividend income.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 2 warning signs for FirstEnergy that investors should take into consideration. 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.