Hydro One (TSE:H) Will Pay A Larger Dividend Than Last Year At CA$0.28

The board of Hydro One Limited (TSE:H) has announced that it will be increasing its dividend on the 30th of June to CA$0.28. The announced payment will take the dividend yield to 3.0%, which is in line with the average for the industry.

Check out our latest analysis for Hydro One

Hydro One's Dividend Is Well Covered By Earnings

While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. Prior to this announcement, Hydro One's dividend was only 63% of earnings, however it was paying out 1,197% of free cash flows. While the company may be more focused on returning cash to shareholders than growing the business at this time, we think that a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.

EPS is set to fall by 1.0% over the next 12 months. If the dividend continues along recent trends, we estimate the payout ratio could be 7.1%, which we consider to be quite comfortable, with most of the company's earnings left over to grow the business in the future.

Hydro One Is Still Building Its Track Record

It is great to see that Hydro One has been paying a stable dividend for a number of years now, however we want to be a bit cautious about whether this will remain true through a full economic cycle. Since 2016, the first annual payment was CA$0.84, compared to the most recent full-year payment of CA$1.12. This means that it has been growing its distributions at 4.9% per annum over that time. Hydro One hasn't been paying a dividend for very long, so we wouldn't get to excited about its record of growth just yet.

The Dividend Has Growth Potential

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Hydro One has impressed us by growing EPS at 8.0% per year over the past five years. The company is paying out a lot of its cash as a dividend, but it looks okay based on the payout ratio.

In Summary

Overall, we always like to see the dividend being raised, but we don't think Hydro One will make a great income stock. While Hydro One is earning enough to cover the payments, the cash flows are lacking. We would be a touch cautious of relying on this stock primarily for the dividend income.

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. Just as an example, we've come across 3 warning signs for Hydro One you should be aware of, and 1 of them is a bit unpleasant. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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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.