Avista's 5.2% Yield Is Funded by Debt, Not Operations

Avista looks like the kind of utility buy you're supposed to find: a 5.2% dividend yield, a P/E of roughly 14, and 22 straight years of dividend increases. The stock has spent most of 2026 drifting lower — down about 6% year-to-date and sitting near its 52-week low of $35.50 — which makes it easy to tell yourself this is a bargain utility that just needs the market to notice.

The problem isn't the business. The problem is that Avista's dividend, which feels secure because it comes from a regulated utility with a long track record, is no longer supported by the cash the company generates from its operations. That disconnect between payout and production is widening, not narrowing, and it sits at the center of everything worth knowing about this stock.

Avista provides electricity to roughly 418,000 customers and natural gas to about 382,000 across Washington and Idaho. It raises and lowers rates through regulator-approved proceedings, earns a stable return on its invested capital, and passes most cost changes through to customers. That is the model that has produced 22 consecutive years of dividend increases, with the most recent quarterly payment set at $0.4925, or $1.97 annualized.

Here is what that model looks like underneath right now. Avista generated $546 million in operating cash flow over the trailing twelve months. It spent $650 million on capital expenditures. The result: free cash flow is negative $104 million. The company is paying out more in infrastructure investment than it brings in from operations. That's not a quarterly blip — it's the structural reality of a utility riding a multi-year capex wave that hasn't even peaked yet.

The capital spending plan tells the full story. Base capex is $615 million for 2026, $635 million in 2027, then jumps to $800 million in 2028 before moderating to $680 million in 2029 and $710 million in 2030. That $800 million year alone would represent more than 100% of Avista's operating cash flow if the current run rate holds. Even excluding incremental transmission and generation projects that could add further spend, the capex trajectory means free cash flow deficits are likely to persist for years, not quarters.

Which brings us to the dividend. At a 5.2% forward yield and a payout ratio of roughly 77% of earnings, the dividend looks large for a utility. And it is — especially against the backdrop of negative free cash flow. The $150 million or so in annual dividends is being funded by borrowing and issuing new shares, not by the operations. In the first half of 2026 alone, Avista drew on its credit facilities and announced plans to issue $230 million in long-term debt and $90 million in common stock for the full year. Total debt now stands at $5.7 billion with a debt-to-equity ratio of 1.16.

None of this means Avista is in trouble. Regulated utilities routinely borrow to fund infrastructure investments that earn a regulated return over decades. The Washington and Idaho utility commissions approve rate increases that, over time, recover this investment. And Avista has guided non-GAAP utility earnings to grow 4% to 6% annually from the 2025 midpoint, which should eventually generate enough earnings to comfortably cover both the capex burden and the dividend.

But there is a gap between "eventually" and "now," and that gap is where the investor's risk lives. The dividend payout ratio of 77% leaves little cushion if earnings stumble. A colder-than-normal winter, higher fuel costs that aren't fully passed through, or regulatory delays on rate recovery all squeeze the margin between earnings and the dividend. Management already factored a $0.12 per share hit into 2026 guidance when a large industrial customer announced plans to return to independent power procurement sooner than expected — a reminder that the rate base isn't immune to attrition.

The recent rate filings add another layer. In late August, Avista filed its annual price adjustment with Washington regulators, which would cut natural gas rates by approximately 11.5% — driven primarily by Climate Commitment Act compliance costs coming back to customers through lower bills. Electric rates would remain nearly flat. These adjustments don't directly hurt earnings since they're pass-through mechanisms, but they're a signal: the regulatory environment in Washington is actively redistributing utility costs, and the headwinds from Washington's clean energy policy are real, not theoretical. A residential customer using average gas would see a monthly bill drop from $96 to about $89. That's good for the customer and, on its face, neutral for Avista. But it reflects a broader political and regulatory pressure on gas utilities in the Pacific Northwest that doesn't point in management's direction.

Step back and look at the valuation. Avista trades at roughly 14 times trailing earnings, compared to peer utilities like WEC Energy at 20 times, CenterPoint at 23 times, and DTE Energy at 21 times. Its EV/EBITDA of 10 is well below the 13- to 17-times range of those same peers. The market is pricing Avista at a material discount. The question is whether that discount reflects a temporary mispricing or a legitimate concern about the company's ability to sustain its return profile through a period of intensifying capital investment and regulatory pressure.

In my opinion, the discount is not irrational. The same capex program that will drive future earnings growth is destroying free cash flow today, and the dividend is bridging that gap with leverage. A 5.2% yield looks generous until you realize it's a yield you receive today in exchange for accepting the risk that tomorrow's earnings — or tomorrow's regulatory environment — won't support it. That's different from a utility whose operations produce more cash than it returns, which then reinvests the surplus. Avista has inverted that order.

The company has a 22-year streak of dividend increases. Streaks of that length create expectations that are harder to meet than they sound, because each year the bar rises. If 2028's $800 million in capex coincides with any softness in rate-case outcomes or customer load, the pressure on the payout ratio becomes real. Not catastrophic — but enough to make the question of sustainability the defining risk for anyone buying this stock for the income.

For investors evaluating Avista, the takeaway is structural, not speculative. The regulated business model is sound, the earnings growth path is plausible, and the long-term return on the rate base should support a reasonable dividend. But the current yield comes with a real trade-off: you're receiving income today that the company doesn't earn from operations, funded instead by debt and equity issuance that will dilute future per-share returns. That trade-off is visible in the numbers, not hidden in them. Whether it's a good trade depends entirely on your conviction that the rate base, the regulators, and the growth plan will deliver on their promise before the balance sheet tells a different story.