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. The payment will take the dividend yield to 5.1%, which is in line with the average for the industry.

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

We aren't too impressed by dividend yields unless they can be sustained over time. The last payment made up 94% of earnings, but cash flows were much higher. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.

The next year is set to see EPS grow by 36.0%. If the dividend continues along recent trends, we estimate the payout ratio will be 64%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

View 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. The dividend has gone from an annual total of SEK9.50 in 2015 to the most recent total annual payment of SEK6.80. The dividend has shrunk at around 3.3% a year during that period. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.

Dividend Growth May Be Hard To Achieve

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. Over the past five years, it looks as though H & M Hennes & Mauritz's EPS has declined at around 2.3% a year. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits. Earnings are predicted to grow over the next year, but we would remain cautious until a track record of earnings growth is established.

Our Thoughts On H & M Hennes & Mauritz's Dividend

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. 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. We don't think H & M Hennes & Mauritz is a great stock to add to your portfolio if income is your focus.

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. 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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