Here's Why We're Wary Of Buying Whitbread's (LON:WTB) 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 Whitbread plc (LON:WTB) is about to trade ex-dividend in the next three days. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. Thus, you can purchase Whitbread's shares before the 29th of October in order to receive the dividend, which the company will pay on the 4th of December.
The company's next dividend payment will be UK£0.364 per share. Last year, in total, the company distributed UK£0.97 to shareholders. Based on the last year's worth of payments, Whitbread stock has a trailing yield of around 3.7% on the current share price of UK£26.01. 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 check whether the dividend payments are covered, and if earnings are growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. An unusually high payout ratio of 284% of its profit suggests something is happening other than the usual distribution of profits to shareholders. 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. Whitbread paid out more free cash flow than it generated - 161%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.
As Whitbread's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.
See our latest analysis for Whitbread
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. Fortunately for readers, Whitbread's earnings per share have been growing at 16% a year for the past five years. Earnings are growing pretty quickly, which is great, but it's uncomfortably to see the company paying out 284% of earnings. Unless there are extenuating circumstances, we feel this is a clear concern around the sustainability of the dividend.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Whitbread has lifted its dividend by approximately 0.7% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Whitbread is keeping back more of its profits to grow the business.
Final Takeaway
Is Whitbread an attractive dividend stock, or better left on the shelf? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
With that in mind though, if the poor dividend characteristics of Whitbread don't faze you, it's worth being mindful of the risks involved with this business. For instance, we've identified 3 warning signs for Whitbread (1 makes us a bit uncomfortable) you should be aware of.
If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
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