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Watsco, Inc. (NYSE:WSO) has announced that it will be increasing its dividend on the 29th of April to US$2.20, which will be 13% higher than last year. This makes the dividend yield about the same as the industry average at 2.7%.
See our latest analysis for Watsco
Watsco's Payment Has Solid Earnings Coverage
We aren't too impressed by dividend yields unless they can be sustained over time. The last dividend made up a very large portion of earnings and also represented 85% of free cash flows. This is usually an indication that the focus of the company is returning cash to shareholders rather than reinvesting it for growth.
Earnings per share is forecast to rise by 11.3% over the next year. If recent patterns in the dividend continues, the payout ratio in 12 months could be 78% which is a bit high but can definitely be sustainable.
Dividend Volatility
The company has a long dividend track record, but it doesn't look great with cuts in the past. The first annual payment during the last 10 years was US$2.28 in 2012, and the most recent fiscal year payment was US$7.80. This means that it has been growing its distributions at 13% per annum over that time. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.
The Dividend Looks Likely To Grow
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Watsco has seen EPS rising for the last five years, at 16% per annum. Past earnings growth has been decent, but unless this is one of those rare businesses that can grow without additional capital investment or marketing spend, we'd generally expect the higher payout ratio to limit its future growth prospects.
In Summary
Overall, we always like to see the dividend being raised, but we don't think Watsco will make a great income stock. The low payout ratio is a redeeming feature, but generally we are not too happy with the payments Watsco has been making. This company is not in the top tier of income providing stocks.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 1 warning sign for Watsco that investors should take into consideration. Is Watsco 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.