Why You Might Be Interested In Bath & Body Works, Inc. (NYSE:BBWI) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Bath & Body Works, Inc. (NYSE:BBWI) is about to trade ex-dividend in the next 2 days. The ex-dividend date occurs one day before the record date, which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is important as the process of settlement involves a full business day. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase Bath & Body Works' shares before the 22nd of August to receive the dividend, which will be paid on the 5th of September.

The company's next dividend payment will be US$0.20 per share, on the back of last year when the company paid a total of US$0.80 to shareholders. Calculating the last year's worth of payments shows that Bath & Body Works has a trailing yield of 2.7% on the current share price of US$30.16. If you buy this business for its dividend, you should have an idea of whether Bath & Body Works's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

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If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Bath & Body Works paid out just 21% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. The good news is it paid out just 22% of its free cash flow in the last year.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

See our latest analysis for Bath & Body Works

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

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. For this reason, we're glad to see Bath & Body Works's earnings per share have risen 18% per annum over the last five years. Earnings per share have been growing rapidly and the company is retaining a majority of its earnings within the business. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Bath & Body Works's dividend payments per share have declined at 5.2% per year on average over the past 10 years, which is uninspiring. Bath & Body Works is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.

Final Takeaway

Is Bath & Body Works an attractive dividend stock, or better left on the shelf? Bath & Body Works has grown its earnings per share while simultaneously reinvesting in the business. Unfortunately it's cut the dividend at least once in the past 10 years, but the conservative payout ratio makes the current dividend look sustainable. Bath & Body Works looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

So while Bath & Body Works looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. To help with this, we've discovered 3 warning signs for Bath & Body Works (1 makes us a bit uncomfortable!) that you ought to be aware of before buying the shares.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.