Don't Race Out To Buy Woolworths Group Limited (ASX:WOW) Just Because It's Going Ex-Dividend

Woolworths Group Limited (ASX:WOW) is about to trade ex-dividend in the next day or so. This means that investors who purchase shares on or after the 1st of September will not receive the dividend, which will be paid on the 6th of October.

Woolworths Group's next dividend payment will be AU$0.48 per share, and in the last 12 months, the company paid a total of AU$0.94 per share. Based on the last year's worth of payments, Woolworths Group has a trailing yield of 2.4% on the current stock price of A$39.77. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Woolworths Group has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Woolworths Group

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year, Woolworths Group paid out 101% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. A useful secondary check can be to evaluate whether Woolworths Group generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 47% of the free cash flow it generated, which is a comfortable payout ratio.

It's good to see that while Woolworths Group's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by Woolworths Group's 13% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Woolworths Group has seen its dividend decline 1.5% per annum on average over the past 10 years, which is not great to see.

To Sum It Up

Has Woolworths Group got what it takes to maintain its dividend payments? It's never great to see earnings per share declining, especially when a company is paying out 101% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Woolworths Group's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that being said, if you're still considering Woolworths Group as an investment, you'll find it beneficial to know what risks this stock is facing. Every company has risks, and we've spotted 3 warning signs for Woolworths Group you should know about.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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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.
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