This Dividend Grower Yields 3.5% and Has a Dividend Safety Rating of “A”

My only experience with the state of Wisconsin involves drinking a lot of beer.

After I graduated college, my buddy and I drove across the United States. We stopped in Milwaukee and, during a tour of the Miller Brewing Company, sampled more than a few of its fine products.

But apparently, there’s more to Wisconsin than beer. There’s also cheese.

And there’s an electric utility that pays a 3.5% yield that has captured the interest of Jim W., who asked me to look at the dividend safety of Wisconsin Energy Corp. (NYSE: WEC).

The company generates electricity from coal, natural gas, oil and alternative sources such as water, wind and biomass. It has been in business since 1987.

Wisconsin Energy has raised its dividend every year for the past 11 years. In 2013, it hiked the dividend twice. Since it began lifting the dividend in 2004, the average annual raise has been an impressive 13%. The current dividend is 30% higher than it stood in late 2012.

Is this impressive track record sustainable? Let’s take a look…

[ad#Google Adsense 336×280-IA]Last year, the company generated $1.231 billion in cash flow from operations.

Because utilities require a lot of spending on infrastructure, capital expenditures are usually fairly high.

In 2013, Wisconsin Energy spent $687 million on capital improvements, leaving it with $544 million in free cash flow.

It paid out $329 million in dividends, for a payout ratio of 60%, well within my comfort zone.

Generally speaking, I like to see a payout ratio of 75% of cash flow or lower.

And, despite the significantly larger dividend over the past few years, the payout ratio has actually fallen over that time. In 2012, the payout ratio was roughly the same level, but in 2011, Wisconsin Energy paid out $79 million more in dividends than it generated in cash flow.

In fact, for years prior, the company either paid out more dividends than it created in cash flow or it was free cash flow negative.

Now that the company has plentiful cash flow and can easily pay the dividend, I don’t see why that would stop. If Wisconsin Energy found a way to pay the dividend when it was struggling to find cash flow, it should have no problem now.

While the payout ratio is currently 60% of cash flow and 62% of earnings, Wisconsin Energy’s policy is to increase the payout ratio to 65% to 70% of earnings by 2017.

Current Wall Street estimates are for the company to earn $2.92 per share in 2017. The midpoint of management’s stated payout ratio suggests a dividend of $1.97, a 26% increase from today’s dividend.

Considering the company’s track record of raising the dividend even when it didn’t have the cash flow to justify it, the improved cash flow today and in the future, and management’s declaration of its dividend policy, it appears the dividend is very solid.

Shareholders can kick back, crack open a can of Milwaukee’s Best, grab a block of Wisconsin Cheddar, collect those Wisconsin Energy Corp. dividends and enjoy all things Badger State without worry.

Dividend Safety Rating: A

If you have a stock whose dividend safety you’d like me to analyze, please leave the ticker symbol in the comment section below.

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Source: Wealthy Retirement