Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Waste Management, Inc. (NYSE:WM) is about to go ex-dividend in just 4 days. Investors can purchase shares before the 5th of March in order to be eligible for this dividend, which will be paid on the 20th of March.
Waste Management's next dividend payment will be US$0.55 per share. Last year, in total, the company distributed US$2.05 to shareholders. Looking at the last 12 months of distributions, Waste Management has a trailing yield of approximately 2.0% on its current stock price of $110.81. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.
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. Waste Management paid out 52% of its earnings to investors last year, a normal payout level for most businesses. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It distributed 43% of its free cash flow as dividends, a comfortable payout level for most companies.
It's positive to see that Waste Management's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at Waste Management, with earnings per share up 7.0% on average over the last five years. Decent historical earnings per share growth suggests Waste Management has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Waste Management has delivered 6.5% dividend growth per year on average over the past ten years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
To Sum It Up
Is Waste Management worth buying for its dividend? Earnings per share growth has been modest and Waste Management paid out over half of its profits and less than half of its free cash flow, although both payout ratios are within normal limits. To summarise, Waste Management looks okay on this analysis, although it doesn't appear a stand-out opportunity.
Ever wonder what the future holds for Waste Management? See what the 15 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.
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