Is Wyndham Hotels & Resorts, Inc. (NYSE:WH) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
Some readers mightn't know much about Wyndham Hotels & Resorts's 0.9% dividend, as it has only been paying distributions for the last three years. A low dividend might not be a bad thing, if the company is reinvesting heavily and growing its sales and profits. The company also returned around 0.9% of its market capitalisation to shareholders in the form of stock buybacks over the past year. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Although it reported a loss over the past 12 months, Wyndham Hotels & Resorts currently pays a dividend. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.
Wyndham Hotels & Resorts paid out 156% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely.
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. It has only been paying dividends for a few short years, and the dividend has already been cut at least once. This is one income stream we're not ready to live on. During the past three-year period, the first annual payment was US$1.0 in 2018, compared to US$0.6 last year. Dividend payments have fallen sharply, down 36% over that time.
When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.
Dividend Growth Potential
With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. Over the past five years, it looks as though Wyndham Hotels & Resorts' EPS have declined at around 49% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Wyndham Hotels & Resorts' earnings per share, which support the dividend, have been anything but stable.
To summarise, shareholders should always check that Wyndham Hotels & Resorts' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're a bit uncomfortable with Wyndham Hotels & Resorts paying a dividend while loss-making, especially since the dividend was also not well covered by free cash flow. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. There are a few too many issues for us to get comfortable with Wyndham Hotels & Resorts from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 1 warning sign for Wyndham Hotels & Resorts that investors should take into consideration.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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What are the risks and opportunities for Wyndham Hotels & Resorts?
Earnings are forecast to grow 4.36% per year
Earnings grew by 85.1% over the past year
Significant insider selling over the past 3 months
Has a high level of debt
This article by Simply Wall St is general in nature. 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.
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