Why It Might Not Make Sense To Buy Whirlpool Corporation (NYSE:WHR) For Its Upcoming Dividend

Whirlpool Corporation (NYSE:WHR) is about to trade ex-dividend in the next four days. The ex-dividend date is one business day before a company’s record date, 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 two full business days. So if you miss that date, you would not show up on the company’s books on the record date. This means that investors who purchase Whirlpool’s shares on or after the 17th of November will not receive the dividend, which will be paid on the 15th of December.

The company’s next dividend payment will be US$1.75 per share, and in the last 12 months, the company paid a total of US$7.00 per share. Looking at the last 12 months of distributions, Whirlpool has a trailing yield of approximately 4.5% on its current stock price of $156.58. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it’s growing.

View our latest analysis for Whirlpool

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. Whirlpool paid out 99% of its earnings, which is more than we’re comfortable with, unless there are mitigating circumstances. 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. Dividends consumed 59% of the company’s free cash flow last year, which is within a normal range for most dividend-paying organisations.

It’s good to see that while Whirlpool’s dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we’re concerned to see Whirlpool’s earnings per share have dropped 9.6% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Whirlpool has lifted its dividend by approximately 13% a year on average. That’s intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Whirlpool is already paying out a high percentage of its income, so without earnings growth, we’re doubtful of whether this dividend will grow much in the future.

The Bottom Line

Has Whirlpool got what it takes to maintain its dividend payments? It’s never fun to see a company’s earnings per share in retreat. What’s more, Whirlpool is paying out a majority of its earnings and over half its free cash flow. It’s hard to say if the business has the financial resources and time to turn things around without cutting the dividend. Overall it doesn’t look like the most suitable dividend stock for a long-term buy and hold investor.

With that being said, if you’re still considering Whirlpool as an investment, you’ll find it beneficial to know what risks this stock is facing. In terms of investment risks, we’ve identified 4 warning signs with Whirlpool and understanding them should be part of your investment process.

Generally, we wouldn’t recommend just buying the first dividend stock you see. Here’s a curated list of interesting stocks that are strong dividend payers.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.