Whitehaven Coal Limited (ASX:WHC) has announced that it will pay a dividend of A$0.09 per share on the 14th of March. Despite this raise, the dividend yield of 3.5% is only a modest boost to shareholder returns.

View our latest analysis for Whitehaven Coal

Whitehaven Coal's Payment Could Potentially Have Solid Earnings Coverage

If it is predictable over a long period, even low dividend yields can be attractive. Based on the last payment, Whitehaven Coal's profits didn't cover the dividend, but the company was generating enough cash instead. Generally, we think cash is more important than accounting measures of profit, so with the cash flows easily covering the dividend, we don't think there is much reason to worry.

Analysts expect a massive rise in earnings per share in the next year. Assuming the dividend continues along recent trends, we estimate that the payout ratio could reach 25%, which is in a comfortable range for us.

Whitehaven Coal's Dividend Has Lacked Consistency

It's comforting to see that Whitehaven Coal has been paying a dividend for a number of years now, however it has been cut at least once in that time. This makes us cautious about the consistency of the dividend over a full economic cycle. The annual payment during the last 7 years was A$0.06 in 2018, and the most recent fiscal year payment was A$0.20. This means that it has been growing its distributions at 19% per annum over that time. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

The Dividend's Growth Prospects Are Limited

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. In the last five years, Whitehaven Coal's earnings per share has shrunk at approximately 3.9% per annum. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. Earnings are predicted to grow over the next year, but we would remain cautious until a track record of earnings growth is established.

Whitehaven Coal's Dividend Doesn't Look Sustainable

In summary, while it's always good to see the dividend being raised, we don't think Whitehaven Coal's payments are rock solid. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. This company is not in the top tier of income providing stocks.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 3 warning signs for Whitehaven Coal that you should be aware of before investing. Is Whitehaven Coal not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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