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Wesfarmers Limited's (ASX:WES) dividend will be increasing from last year's payment of the same period to A$1.07 on 9th of October. This makes the dividend yield 2.7%, which is above the industry average.
View our latest analysis for Wesfarmers
Wesfarmers' Payment Has Solid Earnings Coverage
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 64% of free cash flows. This leaves plenty of cash for reinvestment into the business.
The next year is set to see EPS grow by 27.9%. If the dividend continues along recent trends, we estimate the payout ratio will be 68%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.
Dividend Volatility
Although the company has a long dividend history, it has been cut at least once in the last 10 years. The annual payment during the last 10 years was A$1.93 in 2014, and the most recent fiscal year payment was A$1.98. Dividend payments have been growing, but very slowly over the period. The dividend has seen some fluctuations in the past, so even though the dividend was raised this year, we should remember that it has been cut in the past.
Wesfarmers Could Grow Its Dividend
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Wesfarmers has seen EPS rising for the last five years, at 5.6% per annum. EPS has been growing at a reasonable rate, although with most of the profits being paid out to shareholders, growth prospects could be more limited in the future.
Our Thoughts On Wesfarmers' Dividend
In summary, while it's always good to see the dividend being raised, we don't think Wesfarmers' payments are rock solid. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. We don't think Wesfarmers is a great stock to add to your portfolio if income is your focus.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. 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. If you are a dividend investor, you might also want to look at our curated list of high yield 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.