Don't Buy Corning Incorporated (NYSE:GLW) For Its Next Dividend Without Doing These Checks

Corning Incorporated (NYSE:GLW) is about to trade ex-dividend in the next 4 days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase Corning's shares before the 30th of August to receive the dividend, which will be paid on the 27th of September.

The company's next dividend payment will be US$0.28 per share, on the back of last year when the company paid a total of US$1.12 to shareholders. Based on the last year's worth of payments, Corning stock has a trailing yield of around 2.7% on the current share price of US$41.94. If you buy this business for its dividend, you should have an idea of whether Corning's dividend is reliable and sustainable. As a result, readers should always check whether Corning has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Corning

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. Corning paid out a disturbingly high 218% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. A useful secondary check can be to evaluate whether Corning generated enough free cash flow to afford its dividend. The company paid out 105% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

Cash is slightly more important than profit from a dividend perspective, but given Corning's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

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

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Corning's earnings per share have fallen at approximately 16% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Corning has lifted its dividend by approximately 11% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Corning is already paying out 218% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Has Corning got what it takes to maintain its dividend payments? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (218%) and cash flow as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Although, if you're still interested in Corning and want to know more, you'll find it very useful to know what risks this stock faces. We've identified 4 warning signs with Corning (at least 1 which is significant), and understanding them should be part of your investment process.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.