The Williams Companies, Inc. ( NYSE:WMB ) has announced that it will be increasing its dividend on the 27th of June to US$0.425. This makes the dividend yield 4.7%, which is above the industry average.

See our latest analysis for Williams Companies

Williams Companies Doesn't Earn Enough To Cover Its Payments

A big dividend yield for a few years doesn't mean much if it can't be sustained. Before making this announcement, Williams Companies' dividend was higher than its profits, but the free cash flows quite comfortably covered it. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.

The next 12 months is set to see EPS grow by 23.3%. However, if the dividend continues growing along recent trends, it could start putting pressure on the balance sheet with the payout ratio reaching 106% over the next year.

Williams Companies Has A Solid Track Record

Even over a long history of paying dividends, the company's distributions have been remarkably stable. Since 2012, the first annual payment was US$0.80, compared to the most recent full-year payment of US$1.70. This works out to be a compound annual growth rate (CAGR) of approximately 7.8% a year over that time. Companies like this can be very valuable over the long term, if the decent rate of growth can be maintained.

Williams Companies Might Find It Hard To Grow Its Dividend

Investors could be attracted to the stock based on the quality of its payment history. Williams Companies has seen EPS rising for the last five years, at 131% per annum. EPS has been growing well, but Williams Companies has been paying out a massive proportion of its earnings, which can make the dividend tough to maintain.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Williams Companies' payments are rock solid. The company has been bring in plenty of cash to cover the dividend, but we don't necessarily think that makes it a great dividend stock. We would probably look elsewhere for an income investment.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Williams Companies has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about. Is Williams Companies not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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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.