Could Warrior Met Coal, Inc. (NYSE:HCC) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.
Some readers mightn't know much about Warrior Met Coal's 0.9% dividend, as it has only been paying distributions for the last three years. Many of the best dividend stocks typically start out paying a low yield, so we wouldn't automatically cut it from our list of prospects. The company also bought back stock during the year, equivalent to approximately 3.3% of the company's market capitalisation at the time. Some simple research can reduce the risk of buying Warrior Met Coal for its dividend - read on to learn more.
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Warrior Met Coal paid out 1.6% of its profit as dividends, over the trailing twelve month period. Given the low payout ratio, it is hard to envision the dividend coming under threat, barring a catastrophe.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Warrior Met Coal's cash payout ratio last year was 1.9%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout. It's positive to see that Warrior Met Coal'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.
Consider getting our latest analysis on Warrior Met Coal's financial position here.
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. The dividend has not fluctuated much, but with a relatively short payment history, we can't be sure this is sustainable across a full market cycle. Its most recent annual dividend was US$0.20 per share, effectively flat on its first payment three years ago.
Modest dividend growth is good to see, especially with the payments being relatively stable. However, the payment history is relatively short and we wouldn't want to rely on this dividend too much.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Warrior Met Coal's earnings per share are up 60% on last year. It's good to see earnings per share rising, but one year is too short a period to get excited about. Were this trend to continue, we'd be interested. Earnings per share have grown rapidly, and the company is retaining a majority of its earnings. We think this is ideal from an investment perspective, if the company is able to reinvest these earnings effectively. We do note though, one year is too short a time to be drawing strong conclusions about a company's future prospects.
Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. It's great to see that Warrior Met Coal is paying out a low percentage of its earnings and cash flow. We were also glad to see it growing earnings, although its dividend history is not as long as we'd like. Warrior Met Coal performs highly under this analysis, although it falls slightly short of our exacting standards. At the right valuation, it could be a solid dividend prospect.
Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 4 analysts we track are forecasting for Warrior Met Coal for free with public analyst estimates for the company.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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