Wesfarmers' (ASX:WES) Shareholders Will Receive A Bigger Dividend Than Last Year
Wesfarmers Limited's (ASX:WES) dividend will be increasing from last year's payment of the same period to A$1.03 on 5th of October. This will take the dividend yield to an attractive 3.7%, providing a nice boost to shareholder returns.
Check out our latest analysis for Wesfarmers
Wesfarmers' Dividend Is Well Covered By Earnings
A big dividend yield for a few years doesn't mean much if it can't be sustained. Before this announcement, Wesfarmers was paying out 88% of earnings, but a comparatively small 75% of free cash flows. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.
The next year is set to see EPS grow by 25.3%. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 70% which would be quite comfortable going to take the dividend forward.
Dividend Volatility
The company has a long dividend track record, but it doesn't look great with cuts in the past. The annual payment during the last 10 years was A$1.85 in 2013, and the most recent fiscal year payment was A$1.91. Dividend payments have been growing, but very slowly over the period. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.
Wesfarmers Might Find It Hard To Grow Its Dividend
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. We are encouraged to see that Wesfarmers has grown earnings per share at 12% per year over the past five years. Recently, the company has been able to grow earnings at a decent rate, but with the payout ratio on the higher end we don't think the dividend has many prospects for growth.
In Summary
In summary, while it's always good to see the dividend being raised, we don't think Wesfarmers' payments are rock solid. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would be a touch cautious of relying on this stock primarily for the dividend income.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 2 warning signs for Wesfarmers that investors need to be conscious of moving forward. Is Wesfarmers not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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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.
