Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Reynolds Consumer Products Inc. (NASDAQ:REYN) is about to trade ex-dividend in the next three days. This means that investors who purchase shares on or after the 13th of August will not receive the dividend, which will be paid on the 31st of August.
Reynolds Consumer Products’s next dividend payment will be US$0.22 per share, on the back of last year when the company paid a total of US$0.88 to shareholders. Looking at the last 12 months of distributions, Reynolds Consumer Products has a trailing yield of approximately 2.7% on its current stock price of $32.51. 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.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Reynolds Consumer Products paid out just 23% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out 15% of its free cash flow as dividends last year, which is conservatively low.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. For that reason, it’s encouraging to see Reynolds Consumer Products’s earnings over the past year have risen 25%. While we’d be remiss not to point out that a year is a very short time in dividend investing, it’s an encouraging sign so far. Reynolds Consumer Products earnings per share have been sprinting ahead like the Road Runner at a track and field day; scarcely stopping even for a cheeky “beep-beep”. We also like that it is reinvesting most of its profits in its business.’
We do note though, one year is too short a time to be drawing strong conclusions about a company’s future growth prospects.
Reynolds Consumer Products also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. It’s hard to grow dividends per share when a company keeps creating new shares.
This is Reynolds Consumer Products’s first year of paying a dividend, which is exciting for shareholders – but it does mean there’s no dividend history to examine.
Is Reynolds Consumer Products an attractive dividend stock, or better left on the shelf? Reynolds Consumer Products has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. There’s a lot to like about Reynolds Consumer Products, and we would prioritise taking a closer look at it.
So while Reynolds Consumer Products looks good from a dividend perspective, it’s always worthwhile being up to date with the risks involved in this stock. For instance, we’ve identified 2 warning signs for Reynolds Consumer Products (1 doesn’t sit too well with us) you should be aware of.
If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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This article by Simply Wall St is general in nature. 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.
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