Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Packaging Corporation of America (NYSE:PKG) is about to trade ex-dividend in the next 4 days. You will need to purchase shares before the 12th of March to receive the dividend, which will be paid on the 15th of April.
Packaging Corporation of America's next dividend payment will be US$1.00 per share. Last year, in total, the company distributed US$4.00 to shareholders. Based on the last year's worth of payments, Packaging Corporation of America has a trailing yield of 3.0% on the current stock price of $134.95. If you buy this business for its dividend, you should have an idea of whether Packaging Corporation of America's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Packaging Corporation of America paid out more than half (69%) of its earnings last year, which is a regular payout ratio for most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Fortunately, it paid out only 49% of its free cash flow in the past year.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. 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 Packaging Corporation of America's earnings per share have remained effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share. Earnings per share growth has been slim, and the company is already paying out a majority of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Packaging Corporation of America has increased its dividend at approximately 21% a year on average.
Is Packaging Corporation of America an attractive dividend stock, or better left on the shelf? Earnings per share have been flat and Packaging Corporation of America's dividend payouts are within reasonable limits; without a sharp decline in earnings we feel that the dividend is likely somewhat sustainable. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.
In light of that, while Packaging Corporation of America has an appealing dividend, it's worth knowing the risks involved with this stock. Our analysis shows 3 warning signs for Packaging Corporation of America and you should be aware of these before buying any 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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