The board of Tredegar Corporation (NYSE:TG) has announced that it will pay a dividend on the 1st of July, with investors receiving US$0.12 per share. This means the annual payment is 42% of the current stock price, which is above the average for the industry.
Tredegar Doesn't Earn Enough To Cover Its Payments
A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, the company was paying out 119% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 35%. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.
Earnings per share could rise by 1.4% over the next year if things go the same way as they have for the last few years. However, if the dividend continues growing along recent trends, it could start putting pressure on the balance sheet with the payout ratio reaching 1,654% over the next year.
Tredegar Has A Solid Track Record
The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. The dividend has gone from US$0.16 in 2011 to the most recent annual payment of US$0.48. This works out to be a compound annual growth rate (CAGR) of approximately 12% a year over that time. We can see that payments have shown some very nice upward momentum without faltering, which provides some reassurance that future payments will also be reliable.
Dividend Growth May Be Hard To Achieve
Investors could be attracted to the stock based on the quality of its payment history. Tredegar hasn't seen much change in its earnings per share over the last five years. The earnings growth is anaemic, and the company is paying out 119% of its profit. This gives limited room for the company to raise the dividend in the future.
Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. This company is not in the top tier of income providing stocks.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. As an example, we've identified 3 warning signs for Tredegar that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
If you decide to trade Tredegar, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted
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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.