Don't Buy Raytheon Technologies Corporation (NYSE:RTX) For Its Next Dividend Without Doing These Checks

By
Simply Wall St
Published
May 14, 2021
NYSE:RTX

Readers hoping to buy Raytheon Technologies Corporation (NYSE:RTX) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase Raytheon Technologies' shares before the 20th of May in order to be eligible for the dividend, which will be paid on the 17th of June.

The company's next dividend payment will be US$0.51 per share. Last year, in total, the company distributed US$1.90 to shareholders. Last year's total dividend payments show that Raytheon Technologies has a trailing yield of 2.2% on the current share price of $85.88. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Raytheon Technologies

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Raytheon Technologies's dividend is not well covered by earnings, as the company lost money last year. This is not a sustainable state of affairs, so it would be worth investigating if earnings are expected to recover. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If Raytheon Technologies didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Over the past year it paid out 168% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
NYSE:RTX Historic Dividend May 15th 2021

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Raytheon Technologies reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Raytheon Technologies has lifted its dividend by approximately 1.1% a year on average.

Get our latest analysis on Raytheon Technologies's balance sheet health here.

Final Takeaway

From a dividend perspective, should investors buy or avoid Raytheon Technologies? It's hard to get used to Raytheon Technologies paying a dividend despite reporting a loss over the past year. Worse, the dividend was not well covered by cash flow. It's not that we think Raytheon Technologies is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that being said, if you're still considering Raytheon Technologies as an investment, you'll find it beneficial to know what risks this stock is facing. For instance, we've identified 2 warning signs for Raytheon Technologies (1 doesn't sit too well with us) you should be aware of.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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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