Last update on 2024-06-27

Pinnacle West Capital (PNW) - Dividend Analysis (Final Score: 5/8)

Analyze Pinnacle West Capital's (PNW) dividend performance through our 8-criteria scoring system. Evaluate yield, growth, payout ratio, and stability.

Short Analysis - Dividend Score: 5

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

Pinnacle West Capital (PNW) received a dividend score of 5 out of 8 based on a detailed analysis. The criteria considered include dividend yield being higher than the industry average, average annual growth rate, payout ratio, coverage by earnings and cash flow, stability, duration of payments, and stock repurchases. PNW's dividend yield is higher than the industry average and it has maintained stable dividends over the years. However, the company's average annual growth rate in dividends is inconsistent and lower than 5%, the payout ratio is above the ideal 65% threshold, and dividend coverage by cash flow is weak in many years. Despite paying dividends for over 25 years and stable dividend payments, PNW has issues with frequent share issuances and inconsistent stock repurchases. These factors raise concerns about the sustainability of its dividend policy.

Insights for Value Investors Seeking Stable Income

Given PNW's high dividend yield and stable dividend payments, it may appear attractive to income-focused investors. However, the inconsistency in dividend growth, higher-than-ideal payout ratio, and coverage issues by cash flow suggest that caution is necessary. Prospective investors should consider these red flags and possibly seek more consistent and financially stable dividend-paying stocks. PNW may still be worth holding if already invested due to its historically stable dividends, but newcomers might want to explore other options with better growth and sustainability metrics.

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

Pinnacle West Capital's current dividend yield of 4.8371% is significantly higher than the industry average of 3.12%. Examining the last 20 years, PNW's dividend yield has frequently outpaced the industry average, peaking at 6.5359% in 2008. Historically, it has only dipped close to the industry trend minimally. Despite market fluctuations, PNW has maintained a robust dividend profile. The higher yield could be enticing for income-focused investors, suggesting it offers potentially better returns compared to industry peers. However, investors should also consider the sustainability of this yield relative to PNW’s financial health.

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

The dividend growth rate over the last 20 years provides insights into the stability and reliability of a company's dividend payments. A growth rate higher than 5% generally indicates a healthy dividend policy.

Interpreting the given Dividend Ratios and taking the provided average of 3.711 into account, it is clear that Pinnacle West Capital (PNW) has a variable dividend history. Schizophrenic shifts like a dramatic decline to zero in 2008-2010 and a notable spike in 2018 cast serious doubt on stability. Furthermore, the current dividend growth rate does not meet the 5% criterion. This inconsistent trend is a red flag for investors seeking stable and growing dividend payments.

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

The average payout ratio must be less than 65% over the last 20 years for this criterion.

Examining the given payout ratios and the computed average payout ratio of 80.17%, it is evident that Pinnacle West Capital (PNW) has had a high payout ratio over the last 20 years. The target for this criterion is an average payout ratio of less than 65%. However, the observed average is significantly above this threshold. This trend is particularly concerning as it implies that PNW has been distributing a very high percentage of its earnings as dividends. This can be problematic as it leaves less capital for reinvestment into the business, limiting growth opportunities and potentially increasing the firm's financial risk. Additionally, a payout ratio above 100%, as seen in some years (2005, 2009), suggests that the company was paying out more than it earned, which is unsustainable in the long term.

Dividends Well Covered by Earnings?

Dividends are well covered by the earnings.

Pinnacle West Capital's historical data on earnings per share (EPS) and dividend per share (DPS) reveal some significant trends. Over the past two decades, EPS has fluctuated, notably dropping in 2009 to $0.6748, with a more recent peak in 2021 at $5.4798. Meanwhile, DPS has shown consistent growth, increasing from $1.725 in 2003 to $3.475 in 2023. A critical insight lies in the ratio of dividends covered by earnings. Ratios below 1 indicate that dividends are less covered by earnings, while ratios above 1 suggest better coverage. Recently, this ratio has remained fairly stable, ranging from 0.60 to 0.80, except for outliers like 2009. This signifies moderate but stable coverage. Although the trend is good, ideally, investors look for coverage ratios closer to or above 1 to ensure dividend sustainability and potential for growth.

Dividends Well Covered by Cash Flow?

Dividends Well Covered by Cash Flow measures the sustainability of a company's dividend payouts by comparing them to the company's free cash flow. If the dividend payments exceed the free cash flow, it might be a sign of overextension which could be unsustainable in the long run. Ensuring dividends are well covered by cash flow assures investors of the company's ability to consistently pay and perhaps even increase dividends over time.

A comprehensive analysis of Pinnacle West Capital (PNW) covering years 2003 to 2023 reveals a concerning trend regarding dividend coverage by cash flow. Out of the 21 years observed, only 7 years (2003, 2005, 2009, 2011-2014, 2017) exhibited a cash flow adequately covering dividend payments. Notably positive ratios such as 1.929 in 2005 and 104.167 in 2010 stand out, indicating robust ability to cover dividends in those years. Conversely, for 14 years (2004, 2006-2008, 2010, 2015-2016, 2018-2023), the ratio fell below 1, with particularly troubling negative figures in 2006 (-0.584), 2007 (-0.808), 2008 (-1.674), and most recently 2023 (-0.605). These negative ratios indicate periods where free cash flow was insufficient to cover dividends, pointing towards higher reliance on debt or reserves to sustain dividend payments. The recent trend from 2018 to 2023 with consistently negative values underscores growing concerns about sustainable dividend coverage, indicating that Pinnacle West Capital may need to reassess its dividend strategy to ensure long-term solvency and investor confidence.

Stable Dividends Since the Company Began Paying Dividends?

Stable dividends are crucial for income-focused investors as they look for reliable cash flow, showing financial stability in the company.

Pinnacle West Capital (PNW) has shown remarkable stability in its dividend payments over the past 20 years. The data reveals that the dividend per share has increased almost every year, starting from 1.725 in 2003 to 3.475 in 2023. This consistent and upward trend showcases the company's strong financial position and commitment to returning value to shareholders. There was no instance where the dividend dropped by more than 20%, which further solidifies PNW as a reliable income-generating investment. This trend is excellent for income-seeking investors, indicating promising dividend stability and likely continued growth.

Dividends Paid for Over 25 Years?

Analyzing whether the company has paid dividends for over 25 years is crucial as it speaks to their history of rewarding shareholders. It signifies stability, reliability, and a shareholder-friendly policy.

Pinnacle West Capital (PNW) has consistently paid dividends from 1998 to 2023, reflecting a 25-year period of uninterrupted dividend payouts. Starting from $1.225 per share in 1998, the dividends have shown steady growth, reaching $3.475 per share in 2023. This upward trajectory in dividends not only demonstrates Pinnacle West's commitment to returning value to shareholders but also indicates a robust financial standing and an investor-friendly approach. Therefore, this trend is highly positive, showcasing stability, reliability, and consistent performance in rewarding its shareholders, which is a significant green flag for potential and current investors.

Reliable Stock Repurchases Over the Past 20 Years?

Reliable stock repurchases refer to a company's consistent buybacks of its own shares over time.

Pinnacle West Capital's trend of reliable stock repurchases over the past 20 years appears weak, with significant share issuance over the years. The average annual repurchase is about 1.1006 million shares, but only the year 2019 shows evidence of a stereotypical repurchase. This trend is usually considered bad because consistent share issuance can dilute shareholder value and may indicate the company is using equity financing rather than maintaining strong cash flow for buybacks.