Regulated utility. Payout ratio against earnings is 62 percent, which looks comfortable. But operating cash flow minus capex is negative most years and the dividend is being paid alongside new debt issuance and share sales. Am I misreading the cash flow statement, or is the earnings-based payout ratio simply the wrong measure for this kind of company?
Add a third ratio: dividends divided by cash from operations before capex. It is not the whole story but it is much harder to flatter than earnings, and comparing five years of it shows the direction of travel better than any single number.
Also check whether the payout ratio is quoted on adjusted earnings. A company that has adjusted out the same charge every year for a decade is not adjusting, it is hiding a cost.
The phrase non-recurring appearing five years running should be a formal red flag.
If the yield is above 6 percent something is usually wrong. That is my entire screen.
It is a decent rough filter but it throws away whole sectors where a high payout is structural. I use it as a prompt to look harder rather than to exclude.
@hollis_pike · 3mo ago · 3 replies
You are reading it correctly and the earnings payout ratio is the wrong measure for capital heavy businesses. Depreciation is a large non-cash charge, so earnings can look fine while cash goes out of the door into capex. For regulated utilities the sector convention is to measure the dividend against funds from operations, and to accept that growth capex is funded externally — that is the model, not automatically a warning. What I would actually check: how much of the capex is maintenance versus growth, whether the rate base is growing at a return above the cost of the new capital, and how much of the funding is equity that dilutes you. Issuing shares to pay a dividend is a treadmill. Issuing shares to build assets that earn a regulated return is the job.
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@hollis_pike · 3mo ago
Depreciation is a rough floor for maintenance capex. Anything meaningfully above it is broadly growth. Crude, but it gets you in the right postcode.
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@burr_bennet · 3mo ago
The maintenance versus growth split is not disclosed cleanly anywhere. Any shortcut for estimating it?
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