Targa Resources (NYSE:TRGP) Is Paying Out A Dividend Of $0.35

The board of Targa Resources Corp. (NYSE:TRGP) has announced that it will pay a dividend of $0.35 per share on the 15th of February. Including this payment, the dividend yield on the stock will be 1.9%, which is a modest boost for shareholders' returns.

View our latest analysis for Targa Resources

Targa Resources' Dividend Is Well Covered By Earnings

Even a low dividend yield can be attractive if it is sustained for years on end. Prior to this announcement, the company was paying out 131% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 24%. Generally, we think cash is more important than accounting measures of profit, so with the cash flows easily covering the dividend, we don't think there is much reason to worry.

According to analysts, EPS should be several times higher next year. If the dividend continues along recent trends, we estimate the payout ratio will be 23%, which would make us comfortable with the dividend's sustainability, despite the levels currently being elevated.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2013, the dividend has gone from $1.46 total annually to $1.40. The dividend has shrunk at a rate of less than 1% a year over this period. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.

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. However, Targa Resources has only grown its earnings per share at 2.6% per annum over the past five years. So the company has struggled to grow its EPS yet it's still paying out 131% of its earnings. As they say in finance, 'past performance is not indicative of future performance', but we are not confident a company with limited earnings growth and a high payout ratio will be a star dividend-payer over the next decade.

Our Thoughts On Targa Resources' Dividend

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Targa Resources' payments, as there could be some issues with sustaining them into the future. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. We don't think Targa Resources is a great stock to add to your portfolio if income is your focus.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 4 warning signs for Targa Resources that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high yield 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.