Neoenergia's (BVMF:NEOE3) Dividend Is Being Reduced To R$0.13

Neoenergia S.A. (BVMF:NEOE3) has announced it will be reducing its dividend payable on the 31st of December to R$0.13. This payment takes the dividend yield to 2.5%, which only provides a modest boost to overall returns.

See our latest analysis for Neoenergia

Neoenergia's Earnings Easily Cover the Distributions

Even a low dividend yield can be attractive if it is sustained for years on end. Based on the last payment, Neoenergia was earning enough to cover the dividend, but free cash flows weren't positive. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.

Over the next year, EPS is forecast to fall by 29.0%. Assuming the dividend continues along recent trends, we believe the payout ratio could be 19%, which we are pretty comfortable with and we think is feasible on an earnings basis.

Neoenergia's Dividend Has Lacked Consistency

Looking back, the company hasn't been paying the most consistent dividend, but with such a short dividend history it could be too early to draw solid conclusions. Since 2019, the dividend has gone from R$0.60 to R$0.36. This works out to a decline of approximately 40% over that time. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.

The Dividend Looks Likely To Grow

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. It's encouraging to see Neoenergia has been growing its earnings per share at 39% a year over the past five years. Earnings have been growing rapidly, and with a low payout ratio we think that the company could turn out to be a great dividend stock.

In Summary

Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. 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.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Neoenergia has 4 warning signs (and 3 which are concerning) we think you should know about. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.

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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.