Here's Why We're Wary Of Buying Sonoco Products' (NYSE:SON) For Its Upcoming Dividend

By
Simply Wall St
Published
February 17, 2022
NYSE:SON
Source: Shutterstock

Sonoco Products Company (NYSE:SON) is about to trade ex-dividend in the next four 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 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 Sonoco Products' shares on or after the 22nd of February, you won't be eligible to receive the dividend, when it is paid on the 10th of March.

The company's next dividend payment will be US$0.45 per share. Last year, in total, the company distributed US$1.80 to shareholders. Based on the last year's worth of payments, Sonoco Products has a trailing yield of 3.1% on the current stock price of $57.85. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Sonoco Products can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Sonoco Products

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Sonoco Products 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. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. It paid out an unsustainably high 320% of its free cash flow as dividends over the past 12 months, which is worrying. Our definition of free cash flow excludes cash generated from asset sales, so since Sonoco Products is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.

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

historic-dividend
NYSE:SON Historic Dividend February 17th 2022

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Sonoco Products was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Sonoco Products has lifted its dividend by approximately 4.5% a year on average.

Get our latest analysis on Sonoco Products's balance sheet health here.

The Bottom Line

Should investors buy Sonoco Products for the upcoming dividend? First, it's not great to see the company paying a dividend despite being loss-making over the last year. Second, the dividend was not well covered by cash flow." Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

So if you're still interested in Sonoco Products despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Our analysis shows 2 warning signs for Sonoco Products that we strongly recommend you have a look at before investing in the company.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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