Don't Buy Macy's, Inc. (NYSE:M) For Its Next Dividend Without Doing These Checks

It looks like Macy's, Inc. (NYSE:M) is about to go ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 12th of December will not receive this dividend, which will be paid on the 2nd of January.

Macy's's next dividend payment will be US$0.38 per share, and in the last 12 months, the company paid a total of US$1.51 per share. Based on the last year's worth of payments, Macy's stock has a trailing yield of around 10.0% on the current share price of $15.15. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Macy's has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Macy's

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Fortunately Macy's's payout ratio is modest, at just 48% of profit. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Macy's paid out more free cash flow than it generated - 113%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Macy's paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Macy's's ability to maintain its dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's not ideal to see Macy's's earnings per share have been shrinking at 4.5% a year over the previous five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Macy's has delivered 22% dividend growth per year on average over the past ten years.

To Sum It Up

From a dividend perspective, should investors buy or avoid Macy's? Macy's's earnings per share have fallen noticeably and, although it paid out less than half its profit as dividends last year, it paid out a disconcertingly high percentage of its cashflow, which is not a great combination. It's not that we think Macy's is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Wondering what the future holds for Macy's? See what the 12 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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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