Could the current Woolworths dividend be in jeopardy?

We've asked the question based on the numbers.

| More on:
A woman sits on her lounge in front of her laptop looking concerned.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • Woolworths continued another steady year of capital return to shareholders
  • The dividend has been volatile in recent years, and with free cash flows dwindling this year, could this mean a risk?
  • The Woolworths share price has slipped more than 8% into the red this year to date

Shares of Woolworths Group Ltd (ASX: WOW) have been cyclical these past 12 months, having entered and exited a number of peaks and troughs.

Woolworths had also narrowed its dividend payment earlier in 2022. Although upped its final dividend to 53 cents per share (cps). This brought the FY22 payment to 92cps.

However, what's the health score of Woolworths' dividend, and is it in jeopardy of continuing?

Coverage potentially at risk?

Woolworths increased its full-year payout by around 1.1% on the previous year. It currently trades on a trailing yield of 2.65%.

The total amount paid for the FY22 dividend is expected to be just over $1 billion. And there's also the option for investors to participate in the company's dividend reinvestment plan.

However, it's relevant to know that Woolworths also converted around the same amount in free cash flow (FCF) for the 12 months to 26 June 2022.

Judging from these numbers, it might appear the sustainability of the Woolworths dividend might be at risk.

However, as dividend investors, one critical piece of information we need to obtain is the company's dividend policy. That is, where does it pay dividends from?

This is relevant as some companies choose to pay dividends from profits, whilst others choose to do it from cash flows.

Where does Woolworths pay its dividend from?

Looking at the latter, the conglomerate paid around 115% of its free cash flow in dividends for FY22.

Thankfully, Woolworths doesn't pay dividends from this pile of cash earnings.

According to its annual report, the company says that "[d]ividends are distributions of the group's profit after tax before significant items and assets to its shareholders".

That means it pays dividends from its profit 'pile', versus the remaining free cash it has after obligations.

In that vein, the payout is well covered. Approximately 72.5% of the payout figure is covered by the $1.55 billion in after-tax earnings Woolworths booked in FY22.

Despite this, there's one disadvantage of covering the dividend payout figure from profits versus cash flow, and that's the volatility in dividend payment and yield that can result.

We've seen this in the food and retail giant's dividend stream over the past few years, coming off a high of $1.39 in FY15, and remaining lumpy since.

Meanwhile, the Woolworths share price has slipped more than 8% into the red this year to date.

Should you invest $1,000 in Bhp Group right now?

Before you buy Bhp Group shares, consider this:

Motley Fool investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Bhp Group wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

And right now, Scott thinks there are 5 stocks that may be better buys...

See The 5 Stocks *Returns as of 3 April 2025

Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Dividend Investing

Australian dollar notes in the pocket of a man's jeans, symbolising dividends.
Dividend Investing

The ultimate ASX dividend portfolio for long-term income

Let's see what could make up a strong income portfolio right now.

Read more »

Australian dollar notes in a nest, symbolising a nest egg.
Dividend Investing

How 'homemade dividends' can boost passive income

This investment strategy allows passive income-focused investors to expand their investment universe.

Read more »

Man holding out Australian dollar notes, symbolising dividends.
Dividend Investing

2 ASX dividend shares brokers rate as buys with 7% yields

These high yield shares could be great picks for income investors.

Read more »

Piggy bank at the end of a winding road.
Dividend Investing

Why this $44 billion ASX 200 dividend stock is pushing higher today

The ASX 200 dividend stock trades on a yield of 4.6%.

Read more »

Young girl drinking milk showing off muscles.
Dividend Investing

Up 41% in 2025, how this ASX 200 dividend stock is primed for 'continuing growth'

A leading expert expects ongoing growth from this high-flying ASX 200 dividend stock.

Read more »

A couple working on a laptop laugh as they discuss their ASX share portfolio.
Dividend Investing

Buy these ASX dividend shares for 3.5% to 8% yields

Income investors might want to check out these buy-rated shares.

Read more »

Family shopping for groceries
Dividend Investing

Should I buy Woolworths shares for the 4% dividend yield?

Woolworths shares even delivered two fully franked dividends during the pandemic-addled year of 2020.

Read more »

A happy older couple relax in a hammock together as they think about enjoying life with a passive income stream.
ETFs

Here's why it's a great day to own Vanguard ASX ETFs

Show us the money!

Read more »