Foot Locker (NYSE:FL) Is Due To Pay A Dividend Of $0.40

Foot Locker, Inc. (NYSE:FL) has announced that it will pay a dividend of $0.40 per share on the 27th of October. The dividend yield will be 8.7% based on this payment which is still above the industry average.

While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Foot Locker's stock price has reduced by 31% in the last 3 months, which is not ideal for investors and can explain a sharp increase in the dividend yield.

Check out our latest analysis for Foot Locker

Foot Locker's Payment Has Solid Earnings Coverage

A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, the dividend made up 101% of earnings, and the company was generating negative free cash flows. This high of a dividend payment could start to put pressure on the balance sheet in the future.

The next year is set to see EPS grow by 103.9%. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 52% which brings it into quite a comfortable range.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2013, the dividend has gone from $0.72 total annually to $1.60. This works out to be a compound annual growth rate (CAGR) of approximately 8.3% a year over that time. We have seen cuts in the past, so while the growth looks promising we would be a little bit cautious about its track record.

Dividend Growth Is Doubtful

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. Over the past five years, it looks as though Foot Locker's EPS has declined at around 9.0% a year. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. Earnings are predicted to grow over the next year, but we would remain cautious until a track record of earnings growth is established.

Foot Locker's Dividend Doesn't Look Great

In summary, while it is good to see that the dividend hasn't been cut, we think that at current levels the payment isn't particularly sustainable. The company seems to be stretching itself a bit to make such big payments, but it doesn't appear they can be consistent over time. We don't think that this is a great candidate to be an income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Case in point: We've spotted 3 warning signs for Foot Locker (of which 1 doesn't sit too well with us!) you should know about. 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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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.