NRG Energy's (NYSE:NRG) Shareholders Will Receive A Bigger Dividend Than Last Year

By
Simply Wall St
Published
July 24, 2021
NYSE:NRG
Source: Shutterstock

NRG Energy, Inc. (NYSE:NRG) will increase its dividend on the 16th of August to US$0.33. This takes the annual payment to 3.1% of the current stock price, which is about average for the industry.

View our latest analysis for NRG Energy

NRG Energy's Earnings Easily Cover the Distributions

We aren't too impressed by dividend yields unless they can be sustained over time. Based on the last payment, NRG Energy's profits didn't cover the dividend, but the company was generating enough cash instead. 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.

The next year is set to see EPS grow by 170.2%. If the dividend continues along recent trends, we estimate the payout ratio will be 42%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

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NYSE:NRG Historic Dividend July 24th 2021

NRG Energy Is Still Building Its Track Record

Even though the company has been paying a consistent dividend for a while, we would like to see a few more years before we feel comfortable relying on it. Since 2012, the dividend has gone from US$0.36 to US$1.30. This works out to be a compound annual growth rate (CAGR) of approximately 15% a year over that time. The dividend has been growing rapidly, however with such a short payment history we can't know for sure if payment can continue to grow over the long term, so caution may be warranted.

NRG Energy Might Find It Hard To Grow Its Dividend

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. We are encouraged to see that NRG Energy has grown earnings per share at 76% per year over the past five years. While EPS is growing rapidly, NRG Energy paid out a very high 99% of its income as dividends. If earnings continue to grow, this dividend may be sustainable, but we think a payout this high definitely bears watching.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. Overall, we don't think this company has the makings of a good income stock.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. To that end, NRG Energy has 5 warning signs (and 1 which is a bit concerning) we think you should know about. 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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