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Is Covanta's Juicy Dividend Safe?

The firm's joint venture with Green Investment Group should strengthen dividend sustainability.

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Barbara Noverini: Investors seeking a juicy dividend yield should be aware that waste-to-energy operator Covanta's highly levered balance sheet and recently muted free cash flow challenged the sustainability of the company's generous $1 per share dividend. That said, we believe that a recently announced joint venture between Covanta and the Macquarie-backed Green Investment Group provides support for the dividend, while illuminating a growth pathway for Covanta in attractive international markets.

As of the third quarter, Covanta's all-in leverage ratio was over 7 times EBITDA, significantly higher than historical levels, as the company financed the build of a new waste-to-energy plant in Dublin, Ireland. Plus, in recent years, contract transitions and low metals and energy pricing led to lower free cash flow, which stressed Covanta's dividend to free cash flow payout ratio.

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Barbara Noverini does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.