Heineken (AMS:HEIA) Is Paying Out A Larger Dividend Than Last Year

The board of Heineken N.V. (AMS:HEIA) has announced that it will be paying its dividend of €1.17 on the 2nd of May, an increased payment from last year's comparable dividend. This makes the dividend yield about the same as the industry average at 2.4%.

See our latest analysis for Heineken

Heineken's Payment Could Potentially Have Solid Earnings Coverage

While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. Prior to this announcement, the company was paying out 107% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 34%. 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. If the dividend continues along recent trends, we estimate the payout ratio will be 32%, which would make us comfortable with the dividend's sustainability, despite the levels currently being elevated.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2015, the dividend has gone from €0.89 total annually to €1.86. This works out to be a compound annual growth rate (CAGR) of approximately 7.6% a year over that time. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Heineken might have put its house in order since then, but we remain cautious.

The Dividend Has Limited Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Earnings per share has been sinking by 14% over the last five years. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

Heineken's Dividend Doesn't Look Sustainable

Overall, we always like to see the dividend being raised, but we don't think Heineken will make a great income stock. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. We would be a touch cautious of relying on this stock primarily for the dividend income.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 2 warning signs for Heineken that you should be aware of before investing. Is Heineken not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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