Does Terna - Rete Elettrica Nazionale Società per Azioni (BIT:TRN) Have A Place In Your Dividend Portfolio?

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Could Terna - Rete Elettrica Nazionale Società per Azioni (BIT:TRN) be an attractive dividend share to own for the long haul? Investors are often drawn to a company for its dividend. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

In this case, Terna - Rete Elettrica Nazionale Società per Azioni likely looks attractive to dividend investors, given its 4.4% dividend yield and nine-year payment history. We'd agree the yield does look enticing. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to be form a view on if a company's dividend is sustainable, relative to its net profit after tax. Terna - Rete Elettrica Nazionale Società per Azioni paid out 67% of its profit as dividends, over the trailing twelve month period. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business - which could be good or bad.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Of the free cash flow it generated last year, Terna - Rete Elettrica Nazionale Società per Azioni paid out 31% as dividends, suggesting the dividend is affordable.

Is Terna - Rete Elettrica Nazionale Società per Azioni's Balance Sheet Risky?

As Terna - Rete Elettrica Nazionale Società per Azioni has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A quick way to check a company's financial situation uses these two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA measures a company's total debt load relative to its earnings (lower = less debt), while net interest cover measures the company's ability to pay the interest on its debt (higher = greater ability to pay interest costs). Terna - Rete Elettrica Nazionale Società per Azioni is carrying net debt of 4.79 times its EBITDA, which is getting towards the upper limit of our comfort range on a dividend stock that the investor hopes will endure a wide range of economic circumstances.

Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company's net interest expense. Terna - Rete Elettrica Nazionale Società per Azioni has interest cover of more than 12 times its interest expense, which we think is quite strong.

We update our data on Terna - Rete Elettrica Nazionale Società per Azioni every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. Looking at the last decade of data, we can see that Terna - Rete Elettrica Nazionale Società per Azioni paid its first dividend at least nine years ago. Although it has been paying a dividend for several years now, the dividend has been cut at least once by more than 20%, and we're cautious about the consistency of its dividend across a full economic cycle. During the past nine-year period, the first annual payment was €0.19 in 2010, compared to €0.23 last year. Dividends per share have grown at approximately 2.3% per year over this time. The dividends haven't grown at precisely 2.3% every year, but this is a useful way to average out the historical rate of growth.

It's good to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth, anyway. We're not that enthused by this.

Dividend Growth Potential

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. Terna - Rete Elettrica Nazionale Società per Azioni has grown its earnings per share at 6.3% per annum over the past five years. Earnings per share are growing at an acceptable rate, although the company is paying out more than half of its profits, which we think could constrain its ability to reinvest in its business.

Conclusion

To summarise, shareholders should always check that Terna - Rete Elettrica Nazionale Società per Azioni's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think Terna - Rete Elettrica Nazionale Società per Azioni has an acceptable payout ratio and its dividend is well covered by cashflow. Second, earnings growth has been ordinary, and its history of dividend payments is chequered - having cut its dividend at least once in the past. In sum, we find it hard to get excited about Terna - Rete Elettrica Nazionale Società per Azioni from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.

Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 16 analysts we track are forecasting for Terna - Rete Elettrica Nazionale Società per Azioni for free with public analyst estimates for the company.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.