Don't Race Out To Buy Warner Music Group Corp. (NASDAQ:WMG) Just Because It's Going Ex-Dividend

Warner Music Group Corp. (NASDAQ:WMG) is about to trade ex-dividend in the next three days. You will need to purchase shares before the 19th of February to receive the dividend, which will be paid on the 1st of March.

Warner Music Group's next dividend payment will be US$0.12 per share. Last year, in total, the company distributed US$0.48 to shareholders. Based on the last year's worth of payments, Warner Music Group has a trailing yield of 1.3% on the current stock price of $37.36. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Warner Music Group can afford its dividend, and if the dividend could grow.

View our latest analysis for Warner Music Group

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Warner Music Group reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Warner Music Group paid out more free cash flow than it generated - 177%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Warner Music Group was unprofitable last year, and sadly its loss per share worsened by 275% on the previous year.

Given that Warner Music Group has only been paying a dividend for a year, there's not much of a past history to draw insight from.

Get our latest analysis on Warner Music Group's balance sheet health here.

Final Takeaway

From a dividend perspective, should investors buy or avoid Warner Music Group? We're a bit uncomfortable with it paying a dividend while being loss-making, especially given that the dividend was not well covered by free cash flow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Although, if you're still interested in Warner Music Group and want to know more, you'll find it very useful to know what risks this stock faces. In terms of investment risks, we've identified 2 warning signs with Warner Music Group and understanding them should be part of your investment process.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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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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