Don't Buy Naturgy Energy Group, S.A. (BME:NTGY) For Its Next Dividend Without Doing These Checks

Naturgy Energy Group, S.A. (BME:NTGY) is about to trade ex-dividend in the next 2 days. Investors can purchase shares before the 15th of March in order to be eligible for this dividend, which will be paid on the 17th of March.

Naturgy Energy Group's next dividend payment will be €0.51 per share. Last year, in total, the company distributed €1.41 to shareholders. Looking at the last 12 months of distributions, Naturgy Energy Group has a trailing yield of approximately 6.6% on its current stock price of €21.28. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Naturgy Energy Group can afford its dividend, and if the dividend could grow.

View our latest analysis for Naturgy Energy Group

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Naturgy Energy Group paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If Naturgy Energy Group didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Dividends consumed 70% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Naturgy Energy Group reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Naturgy Energy Group has delivered an average of 6.0% per year annual increase in its dividend, based on the past 10 years of dividend payments.

Get our latest analysis on Naturgy Energy Group's balance sheet health here.

The Bottom Line

Is Naturgy Energy Group worth buying for its dividend? It's hard to get used to Naturgy Energy Group paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. It's not that we think Naturgy Energy Group is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in Naturgy Energy Group and want to know more, you'll find it very useful to know what risks this stock faces. Every company has risks, and we've spotted 2 warning signs for Naturgy Energy Group you should know about.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

If you’re looking to trade Naturgy Energy Group, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.