Woolworths Group Limited (ASX:WOW) has announced that on 27th of September, it will be paying a dividend ofA$0.53, which a reduction from last year's comparable dividend. Despite the cut, the dividend yield of 2.5% will still be comparable to other companies in the industry.
Woolworths Group's Earnings Easily Cover The Distributions
We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. At the time of the last dividend payment, Woolworths Group was paying out a very large proportion of what it was earning and 116% of cash flows. Paying out such a high proportion of cash flows certainly exposes the company to cutting the dividend if cash flows were to reduce.
Looking forward, earnings per share is forecast to rise by 25.8% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 58%, which is in the range that makes us comfortable with the sustainability of the dividend.
The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2012, the annual payment back then was A$1.24, compared to the most recent full-year payment of A$0.92. Doing the maths, this is a decline of about 2.9% per year. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.
Woolworths Group May Find It Hard To Grow The Dividend
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Earnings per share has been crawling upwards at 2.9% per year. Earnings are not growing quickly at all, and the company is paying out most of its profit as dividends. That's fine as far as it goes, but we're less enthusiastic as this often signals that the dividend is likely to grow slower in the future.
Our Thoughts On Woolworths Group's Dividend
Overall, it's not great to see that the dividend has been cut, but this might be explained by the payments being a bit high previously. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We don't think Woolworths Group is a great stock to add to your portfolio if income is your focus.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 2 warning signs for Woolworths Group that investors need to be conscious of moving forward. Is Woolworths Group 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.
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