Neoenergia (BVMF:NEOE3) Is Reducing Its Dividend To R$0.1649

Neoenergia S.A. (BVMF:NEOE3) has announced that on 1st of January, it will be paying a dividend ofR$0.1649, which a reduction from last year's comparable dividend. This means that the annual payment will be 6.2% of the current stock price, which is in line with the average for the industry.

View our latest analysis for Neoenergia

Neoenergia's Payment Has Solid Earnings Coverage

We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Based on the last payment, Neoenergia was earning enough to cover the dividend, but free cash flows weren't positive. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.

Over the next year, EPS is forecast to fall by 3.9%. Assuming the dividend continues along recent trends, we believe the payout ratio could be 22%, which we are pretty comfortable with and we think is feasible on an earnings basis.

Neoenergia's Dividend Has Lacked Consistency

It's comforting to see that Neoenergia has been paying a dividend for a number of years now, however it has been cut at least once in that time. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. Since 2019, the dividend has gone from R$0.598 total annually to R$1.16. This works out to be a compound annual growth rate (CAGR) of approximately 14% a year over that time. Neoenergia 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.

The Dividend Looks Likely To Grow

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. It's encouraging to see that Neoenergia has been growing its earnings per share at 20% a year over the past five years. Earnings per share is growing at a solid clip, and the payout ratio is low which we think is an ideal combination in a dividend stock as the company can quite easily raise the dividend in the future.

Our Thoughts On Neoenergia's Dividend

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We don't think Neoenergia 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. However, there are other things to consider for investors when analysing stock performance. For example, we've identified 2 warning signs for Neoenergia (1 is a bit concerning!) that you should be aware of before investing. Is Neoenergia not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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