Readers hoping to buy Williams-Sonoma, Inc. (NYSE:WSM) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 23rd of January, you won’t be eligible to receive this dividend, when it is paid on the 28th of February.
Williams-Sonoma’s next dividend payment will be US$0.48 per share. Last year, in total, the company distributed US$1.92 to shareholders. Last year’s total dividend payments show that Williams-Sonoma has a trailing yield of 2.5% on the current share price of $76.59. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! As a result, readers should always check whether Williams-Sonoma has been able to grow its dividends, or if the dividend might be cut.
See our latest analysis for Williams-Sonoma
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Williams-Sonoma paid out a comfortable 43% of its profit last year. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Thankfully its dividend payments took up just 47% of the free cash flow it generated, which is a comfortable payout ratio.
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.
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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it’s a relief to see Williams-Sonoma earnings per share are up 8.8% per annum over the last five years. Management have been reinvested more than half of the company’s earnings within the business, and the company has been able to grow earnings with this retained capital. Organisations that reinvest heavily in themselves typically get stronger over time, which can bring attractive benefits such as stronger earnings and dividends.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Williams-Sonoma has delivered 15% dividend growth per year on average over the past ten years. It’s encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
To Sum It Up
From a dividend perspective, should investors buy or avoid Williams-Sonoma? Earnings per share have been growing moderately, and Williams-Sonoma is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Williams-Sonoma is halfway there. Overall we think this is an attractive combination and worthy of further research.
Wondering what the future holds for Williams-Sonoma? See what the 22 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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