It looks like Macy's, Inc. (NYSE:M) is about to go ex-dividend in the next four days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Meaning, you will need to purchase Macy's' shares before the 14th of December to receive the dividend, which will be paid on the 2nd of January.
The company's next dividend payment will be US$0.17 per share, and in the last 12 months, the company paid a total of US$0.66 per share. Looking at the last 12 months of distributions, Macy's has a trailing yield of approximately 3.8% on its current stock price of $17.39. 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 usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Macy's paid out a comfortable 26% of its profit last year. 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 paid out 79% 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.
It's positive to see that Macy's'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?
Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. Macy's's earnings per share have fallen at approximately 13% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Macy's has seen its dividend decline 1.9% per annum on average over the past 10 years, which is not great to see.
To Sum It Up
Has Macy's got what it takes to maintain its dividend payments? Earnings per share have fallen significantly, although at least Macy's paid out less than half of its profits and free cash flow over the last year, leaving some margin of safety. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.
However if you're still interested in Macy's as a potential investment, you should definitely consider some of the risks involved with Macy's. Case in point: We've spotted 3 warning signs for Macy's you should be aware of.
Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.