Zooming in on BVMF:AFLT3's 2.3% Dividend Yield

Could Afluente Transmissão de Energia Elétrica S.A. (BVMF:AFLT3) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

A 2.3% yield is nothing to get excited about, but investors probably think the long payment history suggests Afluente Transmissão de Energia Elétrica has some staying power. Some simple research can reduce the risk of buying Afluente Transmissão de Energia Elétrica for its dividend - read on to learn more.

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Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Afluente Transmissão de Energia Elétrica paid out 107% of its profit as dividends, over the trailing twelve month period. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Afluente Transmissão de Energia Elétrica paid out 179% of its free cash flow last year, which we think is concerning if cash flows do not improve. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely. As Afluente Transmissão de Energia Elétrica's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

With a strong net cash balance, Afluente Transmissão de Energia Elétrica investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on Afluente Transmissão de Energia Elétrica's financial position here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. For the purpose of this article, we only scrutinise the last decade of Afluente Transmissão de Energia Elétrica's dividend payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was R$0.2 in 2011, compared to R$0.2 last year. This works out to be a decline of approximately 1.7% per year over that time. Afluente Transmissão de Energia Elétrica's dividend has been cut sharply at least once, so it hasn't fallen by 1.7% every year, but this is a decent approximation of the long term change.

When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Afluente Transmissão de Energia Elétrica has grown its earnings per share at 8.2% per annum over the past five years. Although per-share earnings are growing at a credible rate, virtually all of the income is being paid out as dividends to shareholders. This is okay, but may limit growth in the company's future dividend payments.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. It's a concern to see that the company paid out such a high percentage of its earnings and cashflow as dividends. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. With this information in mind, we think Afluente Transmissão de Energia Elétrica may not be an ideal dividend stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 1 warning sign for Afluente Transmissão de Energia Elétrica that you should be aware of before investing.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

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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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