Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Ingredion Incorporated (NYSE:INGR) is about to trade ex-dividend in the next three days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. In other words, investors can purchase Ingredion's shares before the 1st of October in order to be eligible for the dividend, which will be paid on the 25th of October.
The company's next dividend payment will be US$0.65 per share, on the back of last year when the company paid a total of US$2.56 to shareholders. Based on the last year's worth of payments, Ingredion stock has a trailing yield of around 2.9% on the current share price of $88.62. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is 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. Ingredion distributed an unsustainably high 124% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether Ingredion generated enough free cash flow to afford its dividend. It distributed 43% of its free cash flow as dividends, a comfortable payout level for most companies.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Ingredion fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
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. Readers will understand then, why we're concerned to see Ingredion's earnings per share have dropped 18% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Ingredion has delivered an average of 17% per year annual increase in its dividend, based on the past 10 years of dividend payments. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Ingredion is already paying out 124% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
To Sum It Up
Should investors buy Ingredion for the upcoming dividend? It's never great to see earnings per share declining, especially when a company is paying out 124% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
With that in mind though, if the poor dividend characteristics of Ingredion don't faze you, it's worth being mindful of the risks involved with this business. In terms of investment risks, we've identified 4 warning signs with Ingredion and understanding them should be part of your investment process.
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.
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.
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