Should Transmissora Aliança de Energia Elétrica S.A. (BVMF:TAEE11) Be Part Of Your Dividend Portfolio?

Could Transmissora Aliança de Energia Elétrica S.A. (BVMF:TAEE11) 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. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

In this case, Transmissora Aliança de Energia Elétrica likely looks attractive to investors, given its 5.8% dividend yield and a payment history of over ten years. It would not be a surprise to discover that many investors buy it for the dividends. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Explore this interactive chart for our latest analysis on Transmissora Aliança de Energia Elétrica!

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. Looking at the data, we can see that 102% of Transmissora Aliança de Energia Elétrica's profits were paid out as dividends in the last 12 months. 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. Transmissora Aliança de Energia Elétrica paid out 90% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. As Transmissora Aliança 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.

Remember, you can always get a snapshot of Transmissora Aliança de Energia Elétrica's latest financial position, by checking our visualisation of its financial health.

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. Transmissora Aliança de Energia Elétrica has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was R$1.1 in 2011, compared to R$1.9 last year. This works out to be a compound annual growth rate (CAGR) of approximately 5.2% a year over that time. Transmissora Aliança de Energia Elétrica's dividend payments have fluctuated, so it hasn't grown 5.2% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Transmissora Aliança de Energia Elétrica might have put its house in order since then, but we remain cautious.

Dividend Growth Potential

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 good to see Transmissora Aliança de Energia Elétrica has been growing its earnings per share at 15% a year over the past five years. Although earnings per share are up nicely Transmissora Aliança de Energia Elétrica is paying out 102% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Transmissora Aliança de Energia Elétrica paid out almost all of its cash flow and profit as dividends, leaving little to reinvest in the business. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. In summary, Transmissora Aliança de Energia Elétrica has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are likely more attractive alternatives out there.

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. Taking the debate a bit further, we've identified 3 warning signs for Transmissora Aliança de Energia Elétrica that investors need to be conscious of moving forward.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding 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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