AGL Energy Limited (ASX:AGL) Will Pay A AU$0.41 Dividend In Four Days

It looks like AGL Energy Limited (ASX:AGL) is about to go ex-dividend in the next four days. This means that investors who purchase shares on or after the 24th of February will not receive the dividend, which will be paid on the 26th of March.

AGL Energy's next dividend payment will be AU$0.41 per share, and in the last 12 months, the company paid a total of AU$0.82 per share. Looking at the last 12 months of distributions, AGL Energy has a trailing yield of approximately 8.1% on its current stock price of A$10.1. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether AGL Energy can afford its dividend, and if the dividend could grow.

See our latest analysis for AGL Energy

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. AGL Energy lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Dividends consumed 63% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. AGL Energy reported a loss last year, but at least the general trend suggests its income has been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. AGL Energy has delivered an average of 3.3% per year annual increase in its dividend, based on the past 10 years of dividend payments. Earnings per share have been growing much quicker than dividends, potentially because AGL Energy is keeping back more of its profits to grow the business.

We update our analysis on AGL Energy every 24 hours, so you can always get the latest insights on its financial health, here.

The Bottom Line

From a dividend perspective, should investors buy or avoid AGL Energy? First, it's not great to see the company paying a dividend despite being loss-making over the last year. On the plus side, the dividend was covered by free cash flow." All things considered, we are not particularly enthused about AGL Energy from a dividend perspective.

If you want to look further into AGL Energy, it's worth knowing the risks this business faces. Be aware that AGL Energy is showing 3 warning signs in our investment analysis, and 2 of those can't be ignored...

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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This article by Simply Wall St is general in nature. 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.
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