Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Reynolds Consumer Products Inc. (NASDAQ:REYN) is about to go ex-dividend in just 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. Calculating the last year’s worth of payments shows that Reynolds Consumer Products has a trailing yield of 2.7% on the current share 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. So we need to investigate whether Reynolds Consumer Products can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Reynolds Consumer Products is paying out just 23% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. A useful secondary check can be to evaluate whether Reynolds Consumer Products generated enough free cash flow to afford its dividend. What’s good is that dividends were well covered by free cash flow, with the company paying out 15% of its cash flow last year.
It’s positive to see that Reynolds Consumer Products’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. 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.’
One year is not very long in the grand scheme of things though, so we wouldn’t draw too strong a conclusion based on these results.
We’d also point out that Reynolds Consumer Products issued a meaningful number of new shares in the past year. 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, so it doesn’t have much of a history yet to compare to.
The Bottom Line
Has Reynolds Consumer Products got what it takes to maintain its dividend payments? We love that Reynolds Consumer Products is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. There’s a lot to like about Reynolds Consumer Products, and we would prioritise taking a closer look at it.
In light of that, while Reynolds Consumer Products has an appealing dividend, it’s worth knowing the risks involved with this stock. Every company has risks, and we’ve spotted 2 warning signs for Reynolds Consumer Products (of which 1 is potentially serious!) you should know about.
We wouldn’t recommend just buying the first dividend stock you see, though. Here’s a list of interesting 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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