Foot Locker, Inc. (NYSE:FL) will increase its dividend on the 29th of April to US$0.40. This will take the dividend yield to an attractive 4.2%, providing a nice boost to shareholder returns.
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 32% in the last 3 months, which is not ideal for investors and can explain a sharp increase in the dividend yield.
Foot Locker's Dividend Is Well Covered By Earnings
If the payments aren't sustainable, a high yield for a few years won't matter that much. However, Foot Locker's earnings easily cover the dividend. This means that most of its earnings are being retained to grow the business.
EPS is set to fall by 48.9% over the next 12 months. Assuming the dividend continues along recent trends, we believe the payout ratio could be 25%, which we are pretty comfortable with and we think is feasible on an earnings basis.
The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2012, the dividend has gone from US$0.66 to US$1.60. This means that it has been growing its distributions at 9.3% per annum over that time. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Foot Locker might have put its house in order since then, but we remain cautious.
The Dividend Looks Likely To Grow
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Foot Locker has seen EPS rising for the last five years, at 13% per annum. A low payout ratio and decent growth suggests that the company is reinvesting well, and it also has plenty of room to increase the dividend over time.
Foot Locker Looks Like A Great Dividend Stock
Overall, we think this could be an attractive income stock, and it is only getting better by paying a higher dividend this year. The earnings easily cover the company's distributions, and the company is generating plenty of cash. However, it is worth noting that the earnings are expected to fall over the next year, which may not change the long term outlook, but could affect the dividend payment in the next 12 months. All in all, this checks a lot of the boxes we look for when choosing 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. For example, we've identified 4 warning signs for Foot Locker (2 are significant!) that you should be aware of before investing. Is Foot Locker not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
What are the risks and opportunities for Foot Locker?
Trading at 65.9% below our estimate of its fair value
Earnings are forecast to grow 26.43% per year
Profit margins (1.8%) are lower than last year (5.6%)
Volatile share price over the past 3 months
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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.