The board of ALLETE, Inc. (NYSE:ALE) has announced that it will be paying its dividend of $0.6775 on the 1st of June, an increased payment from last year's comparable dividend. This takes the dividend yield to 4.3%, which shareholders will be pleased with.
Check out our latest analysis for ALLETE
ALLETE's Payment Has Solid Earnings Coverage
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, ALLETE's dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 181% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.
Over the next year, EPS is forecast to expand by 40.3%. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 62% which brings it into quite a comfortable range.
ALLETE Has A Solid Track Record
The company has an extended history of paying stable dividends. The dividend has gone from an annual total of $1.84 in 2013 to the most recent total annual payment of $2.71. This means that it has been growing its distributions at 3.9% per annum over that time. Although we can't deny that the dividend has been remarkably stable in the past, the growth has been pretty muted.
ALLETE May Find It Hard To Grow The Dividend
The company's investors will be pleased to have been receiving dividend income for some time. Let's not jump to conclusions as things might not be as good as they appear on the surface. Although it's important to note that ALLETE's earnings per share has basically not grown from where it was five years ago, which could erode the purchasing power of the dividend over time.
The Dividend Could Prove To Be Unreliable
In summary, while it's always good to see the dividend being raised, we don't think ALLETE's payments are rock solid. Although they have been consistent in the past, we think the payments are a little high to be sustained. We would be a touch cautious of relying on this stock primarily for the dividend income.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've identified 2 warning signs for ALLETE (1 can't be ignored!) that you should be aware of before investing. Is ALLETE 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.
About NYSE:ALE
Established dividend payer with mediocre balance sheet.
