Italgas S.p.A. (BIT:IG) will increase its dividend on the 25th of May to €0.29. This will take the annual payment from 5.1% to 5.1% of the stock price, which is above what most companies in the industry pay.
Italgas' Earnings Easily Cover the Distributions
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Prior to this announcement, Italgas' dividend was only 66% of earnings, however it was paying out 1,195% of free cash flows. The company might be more focused on returning cash to shareholders, but paying out this much of its cash flow could expose the dividend to being cut in the future.
Over the next year, EPS is forecast to expand by 3.5%. If the dividend continues on this path, the payout ratio could be 62% by next year, which we think can be pretty sustainable going forward.
Italgas Is Still Building Its Track Record
Even though the company has been paying a consistent dividend for a while, we would like to see a few more years before we feel comfortable relying on it. The first annual payment during the last 5 years was €0.20 in 2017, and the most recent fiscal year payment was €0.29. This means that it has been growing its distributions at 8.1% per annum over that time. Investors will likely want to see a longer track record of growth before making decision to add this to their income portfolio.
The Dividend Looks Likely To Grow
Investors could be attracted to the stock based on the quality of its payment history. We are encouraged to see that Italgas has grown earnings per share at 29% per year over the past five years. Italgas is clearly able to grow rapidly while still returning cash to shareholders, positioning it to become a strong dividend payer in the future.
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We don't think Italgas is a great stock to add to your portfolio if income is your focus.
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 2 warning signs for Italgas you should be aware of, and 1 of them is concerning. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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