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Woolworths Group Limited (ASX:WOW) is about to trade ex-dividend in the next 3 days. You can purchase shares before the 4th of March in order to receive the dividend, which the company will pay on the 14th of April.
Woolworths Group's next dividend payment will be AU$0.53 per share. Last year, in total, the company distributed AU$1.01 to shareholders. Based on the last year's worth of payments, Woolworths Group has a trailing yield of 2.6% on the current stock price of A$39.4. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is 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. Its dividend payout ratio is 90% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be concerned if earnings began to decline. 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. Fortunately, it paid out only 33% of its free cash flow in the past year.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Woolworths Group's earnings per share have fallen at approximately 9.4% 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. Woolworths Group's dividend payments per share have declined at 1.3% per year on average over the past 10 years, which is uninspiring.
To Sum It Up
Is Woolworths Group worth buying for its dividend? The payout ratios are within a reasonable range, implying the dividend may be sustainable. Declining earnings are a serious concern, however, and could pose a threat to the dividend in future. In summary, it's hard to get excited about Woolworths Group from a dividend perspective.
However if you're still interested in Woolworths Group as a potential investment, you should definitely consider some of the risks involved with Woolworths Group. In terms of investment risks, we've identified 3 warning signs with Woolworths Group and understanding them should be part of your investment process.
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.
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. 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.
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