The board of Pactiv Evergreen Inc. (NASDAQ:PTVE) has announced that it will pay a dividend on the 15th of December, with investors receiving $0.10 per share. This means that the annual payment will be 3.4% of the current stock price, which is in line with the average for the industry.
Pactiv Evergreen's Earnings Easily Cover The Distributions
While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. Prior to this announcement, Pactiv Evergreen's dividend was only 22% of earnings, however it was paying out 119% of free cash flows. While the business may be attempting to set a balanced dividend policy, a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.
Over the next year, EPS is forecast to expand by 1.8%. If the dividend continues on this path, the payout ratio could be 22% by next year, which we think can be pretty sustainable going forward.
Pactiv Evergreen Is Still Building Its Track Record
The dividend hasn't seen any major cuts in the past, but the company has only been paying a dividend for 2 years, which isn't that long in the grand scheme of things. The most recent annual payment of $0.40 is about the same as the annual payment 2 years ago. It's good to see at least some dividend growth. Yet with a relatively short dividend paying history, we wouldn't want to depend on this dividend too heavily.
The Dividend Looks Likely To Grow
The company's investors will be pleased to have been receiving dividend income for some time. Pactiv Evergreen has impressed us by growing EPS at 114% per year over the past three years. Rapid earnings growth and a low payout ratio suggest this company has been effectively reinvesting in its business. Should that continue, this company could have a bright future.
Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. This company is not in the top tier of income providing stocks.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Pactiv Evergreen has 3 warning signs (and 1 which is significant) we think you should know about. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.
What are the risks and opportunities for Pactiv Evergreen?
Trading at 41.4% below our estimate of its fair value
Earnings grew by 2053.3% over the past year
Earnings are forecast to decline by an average of 9.8% per year for the next 3 years
Interest payments are not well covered by earnings
Large one-off items impacting financial results
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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.