Ternium's (NYSE:TX) Shareholders Will Receive A Bigger Dividend Than Last Year

The board of Ternium S.A. (NYSE:TX) has announced that the dividend on 16th of November will be increased to $1.10, which will be 22% higher than last year's payment of $0.90 which covered the same period. This takes the dividend yield to 7.4%, which shareholders will be pleased with.

View our latest analysis for Ternium

Ternium's Earnings Easily Cover The Distributions

A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, the company was paying out 189% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 31%. Healthy cash flows are always a positive sign, especially when they quite easily cover the dividend.

Earnings per share is forecast to rise by 180.5% over the next year. If recent patterns in the dividend continues, the payout ratio in 12 months could be 78% which is a bit high but can definitely be sustainable.

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. The dividend has gone from an annual total of $0.65 in 2013 to the most recent total annual payment of $2.70. This works out to be a compound annual growth rate (CAGR) of approximately 15% a year over that time. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

Dividend Growth Potential Is Shaky

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Ternium's earnings per share has shrunk at 26% a year over the past five years. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this becomes a long term trend.

Ternium's Dividend Doesn't Look Sustainable

Overall, we always like to see the dividend being raised, but we don't think Ternium will make a great income stock. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. Overall, we don't think this company has the makings of a good income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 2 warning signs for Ternium that investors should take into consideration. Is Ternium not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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