National Fuel Gas Company (NYSE:NFG) will increase its dividend on the 15th of July to US$0.46. Based on the announced payment, the dividend yield for the company will be 3.5%, which is fairly typical for the industry.
National Fuel Gas' Earnings Easily Cover the Distributions
We aren't too impressed by dividend yields unless they can be sustained over time. Prior to this announcement, the dividend made up 187% of earnings, and the company was generating negative free cash flows. Paying out such a large dividend compared to earnings while also not generating free cash flows is a major warning sign for the sustainability of the dividend as these levels are certainly a bit high.
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 47%, which would make us comfortable with the dividend's sustainability, despite the levels currently being elevated.
National Fuel Gas Has A Solid Track Record
The company has an extended history of paying stable dividends. Since 2011, the first annual payment was US$1.38, compared to the most recent full-year payment of US$1.82. This works out to be a compound annual growth rate (CAGR) of approximately 2.8% a year over that time. Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.
Dividend Growth Could Be Constrained
Investors could be attracted to the stock based on the quality of its payment history. National Fuel Gas has seen EPS rising for the last five years, at 24% per annum. Although earnings per share is up nicely National Fuel Gas is paying out 187% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.
National Fuel Gas' Dividend Doesn't Look Sustainable
Overall, we always like to see the dividend being raised, but we don't think National Fuel Gas will make a great income stock. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. We would probably look elsewhere for an income investment.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 3 warning signs for National Fuel Gas that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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