Snam (BIT:SRG) Is Increasing Its Dividend To €0.1743

Snam S.p.A. (BIT:SRG) has announced that it will be increasing its periodic dividend on the 25th of June to €0.1743, which will be 3.0% higher than last year's comparable payment amount of €0.169. This makes the dividend yield 6.4%, which is above the industry average.

See our latest analysis for Snam

Snam's Payment Could Potentially Have Solid Earnings Coverage

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, Snam's dividend was making up a very large proportion of earnings, and the company was also not generating any cash flow to offset this. Generally, we think that this would be a risky long term practice.

Looking forward, earnings per share is forecast to rise by 32.5% over the next year. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 72% which brings it into quite a comfortable range.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The annual payment during the last 10 years was €0.25 in 2015, and the most recent fiscal year payment was €0.285. This means that it has been growing its distributions at 1.3% per annum over that time. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

The Dividend's Growth Prospects Are Limited

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Snam's earnings per share has barely grown, which is not ideal - perhaps this is why the company pays out the majority of its earnings to shareholders. When a company prefers to pay out cash to its shareholders instead of reinvesting it, this can often say a lot about that company's dividend prospects.

The Dividend Could Prove To Be Unreliable

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The track record isn't great, and the payments are a bit high to be considered sustainable. We would be a touch cautious of relying on this stock primarily for the dividend income.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 2 warning signs for Snam that investors need to be conscious of moving forward. Is Snam not quite the opportunity you were looking for? Why not check out our selection of top 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.