If we look at a long-term chart of Avangrid, Inc. (NYSE:AGR) (U.S. Regulated & Renewable Energy Player), we can see that shares have managed to bounce off support that lasts back to the tail-end of 2016. However, due to significant two-sided trading in AGR in recent weeks, shares have not been able to give a convincing long-term buy signal through the popular MACD technical indicator. This indicator is especially prevalent on the long-term charts due to the dual function (Momentum & trend) of the indicator and the sheer quantity of information that goes into the readings.
If indeed shares can push on in upcoming sessions and take out their recent April highs, it would put the odds in favor of a strong trending move if history is something to go by. Apart from the technicals, however, monitoring trends in the key financials which make up Avangrid's dividend can give us key insights into the strength of this company's fundamentals at this moment in time. Avangrid has a proven dividend record that encompasses 21 years, so the above-average current yield of 3.7% is sure to attract investors if indeed the trends stack up.
The dividend payout ratio probably offers the best insight into whether a company's dividend is sustainable or not. The reason being is that if earnings are not there to consistently meet dividend payments, then the payout will not be sustained. Over the past four quarters, Avangrid reported $818 million in net income, and $647 million was paid out to shareholders in the form of a dividend. This gives us a dividend payout ratio of 79.1%. Although this ratio is actually lower than Avangrid´s 5-year average of 99.4%, the $445 million bottom-line number in Q1 came as a result of a restructuring transaction that bloated the bottom-line earnings number artificially. Suffice it to say, although the dividend is currently being covered by earnings, trends in the areas below will give us more insights into how strong the payout really is.
For example, if we go further up the income statement and focus on operating profit, we see that EBIT growth is actually down 11% over the past four quarters. Sales though have been increasing steadily but declining EBIT has resulted in operating margins now coming in at the 11.1% mark. Declining margins are having an impact on net earnings as fiscal 2022 EPS growth is expected to be less than 1% despite the fact that fiscal 2022 sales are expected to grow to approximately $7.13 billion. Although bottom-line growth may appear stifled at present, it is good to see earnings revisions turn up over the past 30 days. Shareholders will be hoping this trend will continue going forward.
Top and bottom-line growth and margin ramifications can only go so far when evaluating the profitability of a company. Metrics such as Avangrid´s return on equity as well as return on assets can give us better insights into how profitable a firm really is. Although Avangrid´s ROE of 4.73% & ROA of 2.07% remain above the company´s 5-year averages, they remain substantially lower (Especially on the equity side) than what the sector, in general, is trading at (8.91% & 2.48%)
Although shares may not look that cheap from a sales or earnings perspective, Avangrid is now trading with a price to book ratio of 0.96. The problem is that Avangrid´s equity as we see above continues to underperform the sector by quite some distance. In saying this, there is always a lapse between book value growth (what Avangrid is achieving) and bottom-line earnings growth so shares may even be cheaper especially when you look at what is taking place internally within the company.
For example, management stated on the recent earnings call that in the Networks segment, Avangrid´s improving customer experience, storm response & crew efficiency will drive this segment forward and result in better outcomes for the company in general. On the Renewables side, the accretive value was realized straight away on the New England offshore wind partnership restructuring deal. Furthermore, plenty of investment is ongoing both in onshore developments as well as offshore as Avangrid continues its quest to be the leading sustainable energy company in the US.
To conclude, when we look at the "Total Return" potential of the firm's dividend, a few trends come to our attention. While dividend payments are currently being covered by earnings, margins have been slipping at the company despite the fact that revenues have been growing. Nevertheless, rising earnings revisions off a low valuation are always welcome especially when shares have recently tested support successfully. Let's see if the company can beat Q2 estimates. We look forward to continued coverage.
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This article was written by
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