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.
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.
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.
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.
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.