Income, naturally, focuses on current dividends. Entergy shares currently carry a dividend yield of 2.75 percent. The payout ratio, the percentage of profits paid as dividends, was 43.3 percent in the trailing 12 months and a five-year average of 46.0 percent. Our analysis assumes that the payout ratio will be 46.0 percent going forward.
Six analysts project a long-term earnings growth rate for Entergy. The highest is 14 percent, the lowest is 4 percent and the average is 7.2 percent. For our purposes, we'll assume 4 percent. We don't have any particular reason to be bearish - indeed, half of the 14 analysts that track the shares have buy ratings on them. And aside from curmudgeonly impulses, we'd like to be as conservative as possible to test that we're indeed looking at a value-priced situation.
Our capital-asset pricing model, using the staid historical beta of 0.24 to reflect volatility, indicates that a new investment in Entergy today would require a 3.3 percent dividend growth rate over the next six years to break even. Our earnings growth rate and our assumed payout ratio results in a projected dividend growth rate of 3.8 percent. The share price therefore seems not to reflect potential growth, and income investors might want to look at the stock.
ETR 1-yr Chart
At the time of publication, Paul DeMartino did not directly own puts or calls or shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.
Note: This is independent investment and analysis from the Reuters.com investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by Reuters.com.