ALLETE (NYSE:ALE) Has Announced That It Will Be Increasing Its Dividend To $0.6775

ALLETE, Inc. (NYSE:ALE) will increase its dividend on the 1st of March to $0.6775, which is 4.2% higher than last year's payment from the same period of $0.65. This will take the annual payment to 4.2% of the stock price, which is above what most companies in the industry pay.

View our latest analysis for ALLETE

ALLETE's Payment Has Solid Earnings Coverage

A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, ALLETE's dividend was making up a very large proportion of earnings, and the company was also not generating any cash flow to offset this. This is a pretty unsustainable practice, and could be risky if continued for the long term.

Looking forward, earnings per share is forecast to rise by 20.6% over the next year. If the dividend continues on this path, the payout ratio could be 65% by next year, which we think can be pretty sustainable going forward.

ALLETE Has A Solid Track Record

The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. Since 2013, the dividend has gone from $1.84 total annually to $2.60. This implies that the company grew its distributions at a yearly rate of about 3.5% over that duration. Although we can't deny that the dividend has been remarkably stable in the past, the growth has been pretty muted.

The Dividend's Growth Prospects Are Limited

Investors could be attracted to the stock based on the quality of its payment history. Unfortunately, ALLETE's earnings per share has been essentially flat over the past five years, which means the dividend may not be increased each year. Slow growth and a high payout ratio could mean that ALLETE has maxed out the amount that it has been able to pay to shareholders. When the rate of return on reinvestment opportunities falls below a certain minimum level, companies often elect to pay a larger dividend instead. This is why many mature companies often have larger dividend yields.

Our Thoughts On ALLETE's Dividend

Overall, we always like to see the dividend being raised, but we don't think ALLETE will make a great income stock. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. Overall, we don't think this company has the makings of a good income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. For example, we've identified 3 warning signs for ALLETE (1 is concerning!) that you should be aware of before investing. Is ALLETE not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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