Last update on 2024-06-27

CMS Energy (CMS) - Dividend Analysis (Final Score: 6/8)

Comprehensive analysis of CMS Energy's dividend performance, showcasing sustainability through an 8-criteria scoring system. Final Score: 6/8.

Short Analysis - Dividend Score: 6

We're running CMS Energy (CMS) against the 8-criteria scoring system to evaluate the performance and stability of a company's dividend policy.

The dividend analysis of CMS Energy (CMS) based on an 8-criteria scoring system shows the following: 1. **Dividend Yield**: CMS Energy has a dividend yield of 3.3615%, which is higher than the industry average of 3.12%. This suggests a solid performance in terms of cash returns to investors. 2. **Dividend Growth Rate**: The average annual growth rate of dividends is 7.89% over the last 20 years, surpassing the 5% benchmark. This indicates strong company growth and able consistently increased dividends. 3. **Payout Ratio**: CMS Energy’s average payout ratio is 43.38%, comfortably below the 65% threshold. This suggests a sustainable dividend policy with room for reinvestment. 4. **Dividend Coverage by Earnings**: Earnings have sufficiently covered dividends. While there were fluctuations, the trend has generally been positive. 5. **Dividend Coverage by Cash Flow**: There have been significant fluctuations in free cash flow, making it challenging to consistently cover dividends. This spotlights challenges in ensuring dividend sustainability purely from operating cash flows. 6. **Stable Dividends**: CMS Energy has shown consistent dividend payments since 2006, indicating reliability for income-focused investors. 7. **Dividend History**: CMS Energy has not paid dividends consistently over the last 25 years, with a gap between 2002 and 2006. However, since 2007, there has been consistent dividend growth. 8. **Stock Repurchases**: CMS Energy has not engaged in significant stock repurchases, which may dilute shareholder value but also suggest a focus on other financial strategies.

Insights for Value Investors Seeking Stable Income

Considering the analysis, CMS Energy presents a moderately positive outlook for dividend-focused investors. The company has a favorable dividend yield and growth rate, sustainable payout ratio, and reliable dividend payments since 2007. However, the fluctuations in cash flow coverage and lack of consistent dividends over 25 years are potential concerns. The absence of significant stock repurchases might dilute shareholder value but can be attributed to specific strategic choices. Overall, it's worth further investigation based on individual investment goals, especially if you're an income-focused investor who is comfortable with some historical instability.

For those who are interested in delving deeper into the specifics, the subsequent section provides a comprehensive exploration of the criteria.

Dividend Yield Higher than the Industry Average?

Dividend yield refers to the ratio of a company's annual dividend to its share price, indicating the cash return an investor gets from investing in the stock.

CMS Energy's current dividend yield of 3.3615% is higher than the industry average of 3.12%, which is favorable for income-focused investors. Over the past 20 years, CMS Energy's dividend yield has generally been close to or above the industry average, with significant outperformance in years like 2012 (3.9377% vs 3.84%) and slightly lower performance in 2013 (3.8102% vs 3.47%). The company's ability to consistently match or exceed industry yields suggests a shareholder-friendly dividend policy. The upward trend in stock price over these years substantiates the rising dividend yields, as the increase in dividends per share is substantial, starting from 0.2 in 2007 to 1.952 in 2023. This trend is particularly crucial in the context of CMS Energy’s nominal yield outperforming the industry, even as share prices increased, indicating strong financial health and promising future payout capabilities.

Average annual Growth Rate higher than 5% in the last 20 years?

Dividend Growth Rate assesses how much the dividend has increased year over year. A rate above 5% is favorable as it indicates strong earnings and company growth.

The average dividend growth rate for CMS Energy (CMS) over the last 20 years is approximately 7.89%, which surpasses the 5% benchmark. This is a positive sign, indicating that the company has been able to consistently increase its dividends at a rate higher than inflation and many other investment options. Observing annual growth rates, despite a rocky start with negative and zero rates, CMS Energy's later performance displayed steady increases with relatively minor declines, especially noteworthy from 2010 onwards. This stable upward trend fosters investor confidence, supporting long-term income generation strategies.

Average annual Payout Ratio lower than 65% in the last 20 years?

The average payout ratio indicates the percentage of earnings paid to shareholders as dividends. A payout ratio lower than 65% is generally considered sustainable, leaving enough earnings for reinvestment and growth.

CMS Energy has an average payout ratio of 43.38% over the last 20 years, comfortably below the 65% threshold. This is indicative of a sustainable dividend policy, allowing the company to retain a portion of its earnings for reinvestment and operational stability. Despite a few years where the payout ratio spiked, notably in 2007 with a negative ratio and in 2017 where it reached 81.31%, the long-term average remains healthy, which is a positive trend.

Dividends Well Covered by Earnings?

Dividends are well covered by the earnings.

Over the years, CMS Energy's earnings per share (EPS) have shown a notable trend of improvement, moving from negative values in the early 2000s to positive and consistently increasing figures. In contrast, dividends per share (DPS) have seen a steady increase. However, when analyzing dividends as a percentage of earnings, a metric known as the dividend payout ratio, it is evident that CMS has had fluctuating coverage. In 2009, the coverage ratio was 0.519, indicating that earnings could more than cover half of the dividends. This was an improvement compared to 2007 when coverage was negative due to negative EPS. The highest coverage was seen in 2017 at 0.8130, meaning earnings nearly covered 81% of the dividends, a good indicator of financial stability. Although fluctuations are present, the general trend shows increasing dividend coverage by earnings. On balance, the dividend coverage seems to be moving in a positive direction, albeit with some periods of lower coverage. Therefore, the trend is moderately good for CMS Energy.

Dividends Well Covered by Cash Flow?

Dividends well covered by cash flow means that a company's free cash flow should exceed the dividend payouts. This ensures that dividends are sustainable without relying on external financing.

The data indicates that CMS Energy has had a volatile free cash flow over the years. For example, free cash flow in 2012 was -$35 million while dividends paid were $252 million, leading to a coverage ratio of -7.2, which is highly unsustainable. In 2019, the ratio was positive at 0.2436, meaning the free cash flow exceeded dividend payments, indicating a favorable trend. However, in 2021, the ratio turned negative again at -1.3026, showing unsustainability. Although CMS Energy had instances where dividends were well-covered, the significant fluctuations in free cash flow make it challenging to rely on this metric for future dividend sustainability. This trend is generally bad as it indicates inconsistency in the company’s ability to cover dividends through operating cash flows.

Stable Dividends Since the Company Began Paying Dividends?

Stability in dividend payments, where the dividend per share did not drop by more than 20% over the past two decades, is of utmost importance for income-seeking investors.

Analyzing the dividend payments for CMS Energy over the past 20 years, we observe that initially from 2003 to 2005, there were no dividend payments. Starting from 2006, CMS Energy has shown a consistent upward trend in dividend payments per share. For instance, from $0.20 in 2007, the dividend per share increased steadily to $1.952 in 2023. This represents consistent growth year-over-year, with no recorded instance of a drop by more than 20%. Such a trend is highly positive for income-seeking investors, indicating reliability and financial robustness. However, the complete absence of dividends in the initial years might show a shift in the company's policy post-2005, but this does not hamper the shown trend of stability post-dividend restoration.

Dividends Paid for Over 25 Years?

Discuss whether a company has consistently paid dividends for over 25 years and the importance of this criterion.

In evaluating CMS Energy's dividend history, it's noticeable that dividends have not been consistently paid out over the last 25 years. Specifically, between the years 2002 and 2006, no dividends were disbursed, which breaks the streak of consecutive payments. While the company did restart its dividend payments from 2007 onwards and has steadily increased its annual dividends since then, the absence of payments during the specific years highlights some potential past financial instability. Consistent dividend payments are often indicative of a company's financial health and its commitment to returning value to shareholders. The break in CMS Energy's dividend payments can be viewed as a red flag for investors who prioritize stable and sustained dividend income. Nevertheless, the steady increase from 2007 to 2023 suggests a strong recovery and commitment to dividends in recent years. This evolving trend from 0 in the early 2000s to 1.952 in 2023 shows significant long-term growth, although it does suggest careful evaluation regarding long-term financial resilience. Thus, from a trend perspective, CMS Energy shows improvements, but the inconsistency potentially weakens the overall attractiveness concerning this criterion.

Reliable Stock Repurchases Over the Past 20 Years?

analyzing stock repurchase over the past 20 years and assessing their impact on shareholder value.

Over the past 20 years, CMS Energy (CMS) has not engaged in any significant stock repurchases, as indicated by an average repurchase amount of just 3.7051%. The company's number of outstanding shares has steadily increased from 146,666,667 shares in 2003 to 294,400,000 shares in 2023, representing a Compound Annual Growth Rate (CAGR) of approximately 3.49%. While share repurchase programs often bolster shareholder value by reducing the number of outstanding shares, CMS has taken the opposite route, diluting shareholder value through consistent share issuance. Factors influencing this decision could include funding for capital projects, acquisitions, or debt reduction—common justifications within the utility sector. The trend of increasing share count is generally viewed as unfavorable from a shareholder’s perspective, as it dilutes existing holdings and indicates a potential over-reliance on equity financing.