WH Smith (LON:SMWH) Has Announced A Dividend Of £0.113

The board of WH Smith PLC (LON:SMWH) has announced that it will pay a dividend of £0.113 per share on the 31st of July. The payment will take the dividend yield to 3.1%, which is in line with the average for the industry.

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WH Smith's Payment Could Potentially Have Solid Earnings Coverage

We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Prior to this announcement, the company was paying out 622% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 23%. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.

According to analysts, EPS should be several times higher next year. Assuming the dividend continues along recent trends, we estimate that the payout ratio could reach 34%, which is in a comfortable range for us.

View our latest analysis for WH Smith

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 £0.35 in 2015, and the most recent fiscal year payment was £0.339. Dividend payments have shrunk at a rate of less than 1% per annum over this time frame. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.

Dividend Growth Potential Is Shaky

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. WH Smith's earnings per share has shrunk at 43% a year over the past five years. Dividend payments are likely to come under some pressure unless EPS can pull out of the nosedive it is in. Over the next year, however, earnings are actually predicted to rise, but we would still be cautious until a track record of earnings growth can be built.

WH Smith's Dividend Doesn't Look Sustainable

Overall, we always like to see the dividend being raised, but we don't think WH Smith will make a great income stock. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We would be a touch cautious of relying on this stock primarily for the dividend income.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For instance, we've picked out 4 warning signs for WH Smith that investors should take into consideration. 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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