Should You Buy Woolworths Group Limited (ASX:WOW) For Its Dividend?
Is Woolworths Group Limited (ASX:WOW) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
A 3.0% yield is nothing to get excited about, but investors probably think the long payment history suggests Woolworths Group has some staying power. The company also returned around 4.0% of its market capitalisation to shareholders in the form of stock buybacks over the past year. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.
Explore this interactive chart for our latest analysis on Woolworths Group!
Payout ratios
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Woolworths Group paid out 89% of its profit as dividends. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Woolworths Group paid out 107% of its free cash flow last year, which we think is concerning if cash flows do not improve. While Woolworths Group's dividends were covered by the company's reported profits, free cash flow is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Woolworths Group to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
Remember, you can always get a snapshot of Woolworths Group's latest financial position, by checking our visualisation of its financial health.
Dividend Volatility
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. Woolworths Group has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have declined on at least one occasion over the past ten years. During the past ten-year period, the first annual payment was AU$1.12 in 2010, compared to AU$1.03 last year. Dividend payments have shrunk at a rate of less than 1% per annum over this time frame.
A shrinking dividend over a ten-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.
Dividend Growth Potential
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Woolworths Group's earnings per share have shrunk at 10% a year over the past five years. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.
Conclusion
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. First, we think Woolworths Group has an acceptable payout ratio, although its dividend was not well covered by cashflow. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In this analysis, Woolworths Group doesn't shape up too well as a dividend stock. We'd find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 2 warning signs for Woolworths Group that investors should take into consideration.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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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. Thank you for reading.
