Energy Alternative Dividends

Most investment scenarios in the renewable energy sector have revolved around growth as new technologies are adopted and penetrate waiting markets.  Companies in the renewable energy sector have matured from development to operating stage and are beginning to generate profits.  Additionally, existing companies have transformed into environmentally friendly players, offering new opportunities for investors with a penchant for sustainability.  To this end we applied a screen based on dividend yield to the companies in our energy alternative indices. 

It turns out dozens of companies pay dividends out of earnings from either renewable energy generation or some other product or service that saves energy.  We picked out a half dozen of the companies with exchange listings.

DIVIDENDS FROM ENERGY ALTERNATIVES
Company Name	Symbol	Forward Dividend Yield	Sales-to-Cash Conversion Rate	Debt-to-Equity	Payout Ratio
Centrica, Plc	CNA.L	9.0%	6.6%	183.7	120.0%
Covanta Holding	CVA	6.7%	13.9%	590.9	227.3%
General Electric	GE	3.4%	8.6%	157.6	48.5%
Methanex Corporation	MEOH	2.3%	25.7%	97.8	32.3%
National Grid, Plc	NGG	5.4%	32.9%	163.2	92.7%
Ormat Technologies	ORA	1.6%	35.5%	68.9	13.4%

Of course, dividends are of no value if discontinued.  Investors need protections from risk.  We looked at the balance sheet strength.  The ability to raise capital is important in supporting a reliable dividend payment policy.  We found that dividend generosity is also accompanied by a willingness to lever the balance sheet with debt.

A strong balance sheet is only part of the investment equation. The rate at which the company converts sales to operating cash flow is also vital.  After interest payments have been made, operating cash flow can be used to cover capital investments and then dividends.  Impressive conversion rates turned up among this small sample, providing encouragement for a dividend motivated position.

However, it can be precarious if a company must use most of its income to feed its dividend promises.  An appropriate limit might be a payout ratio of 75%, leaving the balance for adjusting capitalization and growth investments.  Only three of the six companies in our group have payout ratios below the limit.  Interestingly, the three that do not meet our payout criteria also have exceptionally high debt-to-equity ratios.  An investor might have good reasons for concern about the ability of these three to sustain a dividend.

Of course, there are many more dividend paying companies in the world with strong sustainable energy business models.  Our three measures are a good start to find the most reliable.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.