H & M Hennes & Mauritz (STO:HM B) Is Paying Out A Larger Dividend Than Last Year

H & M Hennes & Mauritz AB (publ)'s (STO:HM B) dividend will be increasing from last year's payment of the same period to SEK3.40 on 14th of May. This takes the annual payment to 5.0% of the current stock price, which is about average for the industry.

We've discovered 1 warning sign about H & M Hennes & Mauritz. View them for free.

H & M Hennes & Mauritz'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 100% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 54%. 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.

Over the next year, EPS is forecast to expand by 38.9%. If the dividend continues along recent trends, we estimate the payout ratio will be 67%, 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 annual payment during the last 10 years was SEK9.75 in 2015, and the most recent fiscal year payment was SEK6.80. The dividend has shrunk at around 3.5% 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.

The Dividend's Growth Prospects Are Limited

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. In the last five years, H & M Hennes & Mauritz's earnings per share has shrunk at approximately 4.9% per annum. 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.

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

Overall, we always like to see the dividend being raised, but we don't think H & M Hennes & Mauritz 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.

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. 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. 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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