Don't Buy International Paper Company (NYSE:IP) For Its Next Dividend Without Doing These Checks

By
Simply Wall St
Published
November 08, 2020
NYSE:IP

It looks like International Paper Company (NYSE:IP) is about to go ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 13th of November will not receive this dividend, which will be paid on the 15th of December.

International Paper's next dividend payment will be US$0.51 per share, on the back of last year when the company paid a total of US$2.05 to shareholders. Based on the last year's worth of payments, International Paper stock has a trailing yield of around 4.4% on the current share price of $46.49. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for International Paper

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. International Paper distributed an unsustainably high 163% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Thankfully its dividend payments took up just 37% of the free cash flow it generated, which is a comfortable payout ratio.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and International Paper 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. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

historic-dividend
NYSE:IP Historic Dividend November 8th 2020

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're not enthused to see that International Paper's earnings per share have remained effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. International Paper has delivered 35% dividend growth per year on average over the past 10 years.

To Sum It Up

Is International Paper worth buying for its dividend? Earnings per share have been effectively flat, which is a bit of a concern given the company is paying out 163% of its profit as dividends, which we feel is uncomfortably high. It's not that we think International Paper is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in International Paper despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example - International Paper has 4 warning signs we think you should be aware of.

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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