H & M Hennes & Mauritz (STO:HM B) Has Announced That It Will Be Increasing Its Dividend To SEK3.40

H & M Hennes & Mauritz AB (publ) (STO:HM B) has announced that it will be increasing its dividend from last year's comparable payment on the 14th of May to SEK3.40. This will take the annual payment to 5.5% of the stock price, which is above what most companies in the industry pay.

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H & M Hennes & Mauritz's Future Dividend Projections Appear Well Covered By Earnings

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Based on the last payment, H & M Hennes & Mauritz's profits didn't cover the dividend, but the company was generating enough cash instead. Healthy cash flows are always a positive sign, especially when they quite easily cover the dividend.

Over the next year, EPS is forecast to expand by 39.5%. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 66% which would be quite comfortable going to take the dividend forward.

See our latest analysis for H & M Hennes & Mauritz

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2015, the dividend has gone from SEK9.50 total annually to SEK6.80. This works out to be a decline of approximately 3.3% per year over that time. 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.

H & M Hennes & Mauritz May Find It Hard To Grow The Dividend

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It's not great to see that H & M Hennes & Mauritz's earnings per share has fallen at approximately 4.9% per year over the past five years. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. Earnings are predicted to grow over the next year, but we would remain cautious until a track record of earnings growth is established.

H & M Hennes & Mauritz's Dividend Doesn't Look Sustainable

In summary, while it's always good to see the dividend being raised, we don't think H & M Hennes & Mauritz's payments are rock solid. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. Overall, we don't think this company has the makings of a good income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 1 warning sign for H & M Hennes & Mauritz that investors need to be conscious of moving forward. Is H & M Hennes & Mauritz not quite the opportunity you were looking for? Why not check out our selection of top 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.