Snam's (BIT:SRG) Upcoming Dividend Will Be Larger Than Last Year's

Snam S.p.A.'s (BIT:SRG) periodic dividend will be increasing on the 25th of June to €0.1743, with investors receiving 3.0% more than last year's €0.169. This will take the dividend yield to an attractive 6.0%, providing a nice boost to shareholder returns.

We've discovered 2 warning signs about Snam. View them for free.

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. The last dividend made up quite a large portion of free cash flows, and this was made worse by the lack of free cash flows. Generally, we think that this would be a risky long term practice.

Looking forward, earnings per share is forecast to rise by 13.2% over the next year. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 70% which brings it into quite a comfortable range.

Check out our latest analysis for Snam

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2015, the dividend has gone from €0.25 total annually to €0.291. This implies that the company grew its distributions at a yearly rate of about 1.5% over that duration. We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments the total shareholder return may be limited.

Snam May Find It Hard To Grow The Dividend

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Earnings have grown at around 2.6% a year for the past five years, which isn't massive but still better than seeing them shrink. Earnings are not growing quickly at all, and the company is paying out most of its profit as dividends. When the rate of return on reinvestment opportunities falls below a certain minimum level, companies often elect to pay a larger dividend instead. This is why many mature companies often have larger dividend yields.

Snam's Dividend Doesn't Look Sustainable

Overall, we always like to see the dividend being raised, but we don't think Snam will make a great income stock. The payments are bit high to be considered sustainable, and the track record isn't the best. Overall, we don't think this company has the makings of a good income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Just as an example, we've come across 2 warning signs for Snam you should be aware of, and 1 of them can't be ignored. 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.