Warner Music Group Corp. (NASDAQ:WMG) has announced that it will pay a dividend of $0.18 per share on the 4th of March. This means the annual payment is 2.0% of the current stock price, which is above the average for the industry.

See our latest analysis for Warner Music Group

Warner Music Group's Payment Could Potentially Have Solid Earnings Coverage

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before this announcement, Warner Music Group was paying out 75% of earnings, but a comparatively small 75% of free cash flows. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.

Over the next year, EPS is forecast to expand by 72.6%. If the dividend continues along recent trends, we estimate the payout ratio will be 53%, which is in the range that makes us comfortable with the sustainability of the dividend.

Warner Music Group Doesn't Have A Long Payment History

Even though the company has been paying a consistent dividend for a while, we would like to see a few more years before we feel comfortable relying on it. Since 2020, the annual payment back then was $0.48, compared to the most recent full-year payment of $0.72. This works out to be a compound annual growth rate (CAGR) of approximately 8.4% a year over that time. Warner Music Group has a nice track record of dividend growth but we would wait until we see a longer track record before getting too confident.

The Dividend Looks Likely To Grow

The company's investors will be pleased to have been receiving dividend income for some time. Warner Music Group has impressed us by growing EPS at 11% per year over the past five years. EPS has been growing at a reasonable rate, although with most of the profits being paid out to shareholders, growth prospects could be more limited in the future.

We Really Like Warner Music Group's Dividend

Overall, we like to see the dividend staying consistent, and we think Warner Music Group might even raise payments in the future. Earnings are easily covering distributions, and the company is generating plenty of cash. All of these factors considered, we think this has solid potential as a dividend stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 3 warning signs for Warner Music Group that investors should take into consideration. Is Warner Music Group not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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