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The AES Corporation: Another Utility With Leverage On An Unsustainable Path

Jun. 07, 2020 3:39 PM ETThe AES Corporation (AES)21 Comments
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  • Normally utility companies are seen as a safe and reliable source of dividend income, such as The AES Corporation, but the analysis of their finances should still not be skipped.
  • Whilst debt-funded growth can be an excellent way to grow, their leverage still has to be taking a sustainable path as it cannot increase indefinitely.
  • Since the end of 2013, their total free cash flow has been negative and thus their dividend has been funded through debt.
  • During this same period of time, their leverage has increased and thus is now very high, although thankfully their liquidity is still adequate.
  • After considering all the factors analyzed, I believe that a neutral rating is appropriate, but this was only a marginal decision and would have been bearish without their adequate liquidity.


Traditionally utility companies such as The AES Corporation (NYSE:AES) are considered safe and reliable sources for dividend income, however, it can be risky for investors to simply jump to this conclusion without analyzing their finances. This is especially relevant given their often heavy reliance on debt and the fact that interest rates are almost certainly not going any lower. Whilst I have nothing against using debt to fund growth, it does not matter what type of company, their leverage cannot continue increasing indefinitely.

Cash Flows & Debt

Thankfully the graphs largely speak for themselves, with the first three graphs included below summarizing their cash flows and debt from the last quarter and previous seven years.

The AES Corporation cash flowsThe AES Corporation notes 1

Image Source: Author

Their historical cash flow was primarily provided for general context and to frame the subsequent analysis. Throughout the last seven years, it can be seen that their free cash flow has varied with only one year being very slightly positive and unfortunately has also been declining in the most recent years, with the economic downturn in the first quarter of 2020 only weighing it down further year on year. Since it stems from relatively high capital expenditure, the extent that this is problematic will depend on their overall financial position and whether these investments are producing sufficient returns.

The AES Corporation dividend coverage

Image Source: Author

Following their previously discussed scarcity of free cash flow, their negative dividend coverage should not be surprising, despite always being easily covered by adjusted earnings. Since the beginning of 2013 their dividend payments have totaled $1.947b, which clearly exceeds their total free cash flow of negative $4.27b during this same time period. Since dividends are ultimately paid with free cash flow cash not adjusted earnings, this indicates that the entirety of their dividend payments have been funded through debt, which at best is highly questionable if it could be

This article was written by

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I am no longer active, as I am taking a hiatus from finance to pursue business ventures in other sectors.  I hope that my analysis was helpful to investors across the years, thank you.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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