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Ternium S.A. (NYSE:TX) will increase its dividend from last year's comparable payment on the 8th of May to $2.20. This will take the annual payment to 8.3% of the stock price, which is above what most companies in the industry pay.
See our latest analysis for Ternium
Ternium's Dividend Is Well Covered By Earnings
We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, the company was paying out 96% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 62%. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.
Looking forward, earnings per share is forecast to rise by 88.0% over the next year. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 59% which would be quite comfortable going to take the dividend forward.
Dividend Volatility
Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2014, the dividend has gone from $0.65 total annually to $3.30. This implies that the company grew its distributions at a yearly rate of about 18% over that duration. Ternium has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.
Dividend Growth Potential Is Shaky
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Over the past five years, it looks as though Ternium's EPS has declined at around 15% a year. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough. On the bright side, earnings are predicted to gain some ground over the next year, but until this turns into a pattern we wouldn't be feeling too comfortable.
Ternium's Dividend Doesn't Look Sustainable
Overall, we always like to see the dividend being raised, but we don't think Ternium will make a great income stock. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We don't think Ternium is a great stock to add to your portfolio if income is your focus.