H & M Hennes & Mauritz's (STO:HM B) Dividend Will Be SEK3.25

H & M Hennes & Mauritz AB (publ) (STO:HM B) will pay a dividend of SEK3.25 on the 15th of November. This payment means that the dividend yield will be 4.2%, which is around the industry average.

See our latest analysis for H & M Hennes & Mauritz

H & M Hennes & Mauritz's Earnings Easily Cover The Distributions

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 168% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 46%. Generally, we think cash is more important than accounting measures of profit, so with the cash flows easily covering the dividend, we don't think there is much reason to worry.

Analysts expect a massive rise in earnings per share in the next year. Assuming the dividend continues along recent trends, we estimate that the payout ratio could reach 49%, which is in a comfortable range for us.

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 SEK9.50 in 2013, and the most recent fiscal year payment was SEK6.50. Doing the maths, this is a decline of about 3.7% per year. 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

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Over the past five years, it looks as though H & M Hennes & Mauritz's EPS has declined at around 13% a year. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. 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.

The Dividend Could Prove To Be Unreliable

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. 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 probably look elsewhere for an income investment.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. 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 2 warning signs 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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