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AES Corp (AES) Gifts Investors with 9% Dividend Increase

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The AES Corporation AES announced that its board of directors has approved a 9.1% hike in the quarterly common stock dividend, bringing the annualized payout to 48 cents per share. The annual yield on the dividend is 4%, slightly lower than the previous level of 4.9%. This decline indicates an ongoing increase in the company's share price.

This is in line with the company’s capital allocation plan that comes with a promise of 10% growth in dividend, every year.  

Details of the Hike

The new dividend of 12 cents per share, compared to the prior payment of 11 cents, will be effective from the first quarter of 2017. The amount will be paid on Feb 15, 2017 to shareholders of record as of Feb 1. The ex-dividend date is Jan 30, 2017.

This marks the fourth consecutive annual hike since the company's first dividend payout in 2012. The AES Corp.’s strong cash flow outlook and solid balance sheet enables it to increase its dividend at above-average rates at regular intervals.

Rationale for the Hike

The AES Corp. strives to maintain a flexible liquidity position. Between 2016 and 2018, the company expects to generate $2.6 billion in discretionary cash. This includes a 30% increase in its Parent Free Cash Flow over the 2013-2015 levels. As of Sep 30, 2016, the company had cash and cash equivalents of $1,325 million, up from $1,257 million as of Dec 31, 2015. In the first nine months of 2016, cash from operating activities was $2,182 million, compared with $1,505 million a year ago.

Apart from utilizing funds for expansion projects, a stable financial position allows the company to execute initiatives like debt prepayment and refinancing, share repurchase programs, and regular dividend payments. In the first nine months of 2016, the company returned $297 million to shareholders in the form of dividend.

Future Expectations

The AES Corp. expects average annual growth in proportional and parent free cash flow of at least 10%. Importantly, in 2016, it expects to generate approximately $1.0–$1.3 billion, or 95 cents to $1.05 per share, of proportional free cash flow. Moreover, The AES Corp. expects to generate about $525–$625 million in parent free cash flow in 2016.

Currently, the company is left with approximately $400 million of discretionary cash, which together with its 2017 free cash flow, is expected to offer a strong foundation to grow its dividend, going forward.,

Price Movement

The AES Corp.'s stock has gained about 28.3% in the last one year, outperforming the Zacks Categorized Utility - Electric Power industry’s gain of 4.9%. This could be because the company continues to streamline its portfolio through asset divestments, as well as by exiting markets and businesses where it does not have or cannot develop a competitive advantage. Further, the company is focused on preserving its financial flexibility by reducing costs and expanding its generation capacity.

Zacks Rank & Key Picks

The AES Corp. currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the power sector include Hawaiian Electric Industries, Inc. HE, CenterPoint Energy, Inc. (CNP - Free Report) and DTE Energy Company DTE, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

On an average, Hawaiian Electric has delivered a positive earnings surprise of 2.38% in the trailing four quarters. The company’s 2016 earnings estimates increased 4.2% over the last 60 days.

CenterPoint Energy delivered a positive earnings surprise of 5.07% in the trailing four quarters. The company’s 2016 earnings estimates were up 2.6% in the last 60 days.

DTE Energy’s 2016 earnings estimates increased 1.3% over the last 60 days. On an average, the company has delivered a positive earnings surprise of 10.07% in the trailing four quarters.

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