It Might Not Be A Great Idea To Buy Neenah, Inc. (NYSE:NP) For Its Next Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Neenah, Inc. (NYSE:NP) is about to trade ex-dividend in the next four days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. Therefore, if you purchase Neenah's shares on or after the 12th of August, you won't be eligible to receive the dividend, when it is paid on the 2nd of September.

The company's upcoming dividend is US$0.47 a share, following on from the last 12 months, when the company distributed a total of US$1.88 per share to shareholders. Looking at the last 12 months of distributions, Neenah has a trailing yield of approximately 3.9% on its current stock price of $48.01. If you buy this business for its dividend, you should have an idea of whether Neenah's dividend is reliable and sustainable. So we need to investigate whether Neenah can afford its dividend, and if the dividend could grow.

See our latest analysis for Neenah

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. Neenah lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. 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 Neenah 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. Dividends consumed 62% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Neenah 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.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Neenah has delivered an average of 17% per year annual increase in its dividend, based on the past 10 years of dividend payments.

Remember, you can always get a snapshot of Neenah's financial health, by checking our visualisation of its financial health, here.

To Sum It Up

Has Neenah got what it takes to maintain its dividend payments? It's hard to get used to Neenah paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Neenah. For example, we've found 2 warning signs for Neenah (1 shouldn't be ignored!) that deserve your attention before investing in the shares.

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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