Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Iberdrola, S.A. (BME:IBE) is about to trade ex-dividend in the next four days. Ex-dividend means that investors that purchase the stock on or after the 12th of January will not receive this dividend, which will be paid on the 26th of January.
Iberdrola's next dividend payment will be €0.14 per share, on the back of last year when the company paid a total of €0.40 to shareholders. Looking at the last 12 months of distributions, Iberdrola has a trailing yield of approximately 3.3% on its current stock price of €12.23. If you buy this business for its dividend, you should have an idea of whether Iberdrola's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Iberdrola paid out a comfortable 42% of its profit last year. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Luckily it paid out just 19% of its free cash flow last year.
It's positive to see that Iberdrola'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.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Iberdrola earnings per share are up 9.1% per annum over the last five years. Management have been reinvested more than half of the company's earnings within the business, and the company has been able to grow earnings with this retained capital. We think this is generally an attractive combination, as dividends can grow through a combination of earnings growth and or a higher payout ratio over time.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Iberdrola has delivered 1.8% dividend growth per year on average over the past 10 years.
To Sum It Up
From a dividend perspective, should investors buy or avoid Iberdrola? Earnings per share have been growing moderately, and Iberdrola is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Iberdrola is halfway there. It's a promising combination that should mark this company worthy of closer attention.
So while Iberdrola looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Our analysis shows 2 warning signs for Iberdrola and you should be aware of these before buying any shares.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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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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