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Here's Why We're Wary Of Buying Western Digital Corporation's (NASDAQ:WDC) For Its Upcoming Dividend

Simply Wall St

Western Digital Corporation (NASDAQ:WDC) stock is about to trade ex-dividend in 4 days time. Investors can purchase shares before the 3rd of October in order to be eligible for this dividend, which will be paid on the 22nd of October.

Western Digital's next dividend payment will be US$0.5 per share. Last year, in total, the company distributed US$2.0 to shareholders. Based on the last year's worth of payments, Western Digital stock has a trailing yield of around 3.3% on the current share price of $60.49. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Western Digital has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Western Digital

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Western Digital paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. It paid out 87% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

NasdaqGS:WDC Historical Dividend Yield, September 28th 2019

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Western Digital reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past seven years, Western Digital has increased its dividend at approximately 10% a year on average.

We update our analysis on Western Digital every 24 hours, so you can always get the latest insights on its financial health, here.

Final Takeaway

Is Western Digital worth buying for its dividend? We're a bit uncomfortable with it paying a dividend while being loss-making. However, we note that the dividend was covered by cash flow. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Wondering what the future holds for Western Digital? See what the 26 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.