Yahoo Finance Read This Before Considering Watsco, Inc. (NYSE:WSO) For Its Upcoming 1.0% Dividend
Watsco, Inc. (NYSE:WSO) stock is about to trade ex-dividend in 3 days time. You will need to purchase shares before the 11th of October to receive the dividend, which will be paid on the 31st of October.
Watsco's next dividend payment will be US$1.6 per share, and in the last 12 months, the company paid a total of US$6.4 per share. Based on the last year's worth of payments, Watsco stock has a trailing yield of around 3.9% on the current share price of $164.07. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Watsco can afford its dividend, and if the dividend could grow.
View our latest analysis for Watsco
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Last year Watsco paid out 94% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out 95% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.
Cash is slightly more important than profit from a dividend perspective, but given Watsco's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Fortunately for readers, Watsco's earnings per share have been growing at 12% a year for the past five years. It's not encouraging to see Watsco paying out basically all of its earnings and cashflow to shareholders. We're glad that earnings are growing rapidly, but we're wary of the company stretching itself financially.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last ten years, Watsco has lifted its dividend by approximately 14% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
Final Takeaway
Should investors buy Watsco for the upcoming dividend? While it's nice to see earnings per share growing, we're curious about how Watsco intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Watsco.
Ever wonder what the future holds for Watsco? See what the ten 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.
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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. Thank you for reading.
