Is CGE Gas Natural S.A. (SNSE:CGEGAS) At Risk Of Cutting Its Dividend?

Could CGE Gas Natural S.A. (SNSE:CGEGAS) 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.

With a four-year payment history and a 9.7% yield, many investors probably find CGE Gas Natural intriguing. We'd agree the yield does look enticing. Remember though, due to the recent spike in its share price, CGE Gas Natural's yield will look lower, even though the market may now be factoring in an improvement in its long-term prospects. Some simple analysis can reduce the risk of holding CGE Gas Natural for its dividend, and we'll focus on the most important aspects below.

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Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, 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. CGE Gas Natural paid out 57% of its profit as dividends, over the trailing twelve month period. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business - which could be good or bad.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. The company paid out 65% of its free cash flow, which is not bad per se, but does start to limit the amount of cash CGE Gas Natural has available to meet other needs. It's positive to see that CGE Gas Natural's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Consider getting our latest analysis on CGE Gas Natural's financial position here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Looking at the data, we can see that CGE Gas Natural has been paying a dividend for the past four years. This company's dividend has been unstable, and with a relatively short history, we think it's a little soon to draw strong conclusions about its long term dividend potential. During the past four-year period, the first annual payment was CL$20.0 in 2017, compared to CL$29.0 last year. This works out to be a compound annual growth rate (CAGR) of approximately 9.7% a year over that time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.

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

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. CGE Gas Natural's EPS have fallen by approximately 17% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and CGE Gas Natural's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that CGE Gas Natural's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think CGE Gas Natural is paying out an acceptable percentage of its cashflow and profit. Earnings per share are down, and CGE Gas Natural's dividend has been cut at least once in the past, which is disappointing. In summary, CGE Gas Natural 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.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 3 warning signs for CGE Gas Natural (of which 1 is concerning!) you should know about.

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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