MGE Energy's (NASDAQ:MGEE) Shareholders Will Receive A Bigger Dividend Than Last Year

MGE Energy, Inc.'s (NASDAQ:MGEE) dividend will be increasing to US$0.39 on 15th of September. Although the dividend is now higher, the yield is only 1.8%, which is below the industry average.

See our latest analysis for MGE Energy

MGE Energy's Payment Has Solid Earnings Coverage

While yield is important, another factor to consider about a company's dividend is whether the current payout levels are feasible. Before making this announcement, MGE Energy was earning enough to cover the dividend, but it wasn't generating any free cash flows. No cash flows could definitely make returning cash to shareholders difficult, or at least mean the balance sheet will come under pressure.

EPS is set to fall by 1.0% over the next 12 months. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be 54%, which is comfortable for the company to continue in the future.

MGE Energy Has A Solid Track Record

Even over a long history of paying dividends, the company's distributions have been remarkably stable. The first annual payment during the last 10 years was US$1.00 in 2011, and the most recent fiscal year payment was US$1.55. This works out to be a compound annual growth rate (CAGR) of approximately 4.5% a year over that time. While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is less attractive.

MGE Energy Could Grow Its Dividend

Investors could be attracted to the stock based on the quality of its payment history. MGE Energy has impressed us by growing EPS at 6.8% per year over the past five years. While on an earnings basis, this company looks appealing as an income stock, the cash payout ratio still makes us cautious.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think MGE Energy's payments are rock solid. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We would be a touch cautious of relying on this stock primarily for the dividend income.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 1 warning sign for MGE Energy that investors need to be conscious of moving forward. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.

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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.
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