Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Greif, Inc. (NYSE:GEF) is about to trade ex-dividend in the next three days. Investors can purchase shares before the 17th of December in order to be eligible for this dividend, which will be paid on the 1st of January.
Greif's next dividend payment will be US$0.44 per share. Last year, in total, the company distributed US$1.76 to shareholders. Based on the last year's worth of payments, Greif has a trailing yield of 3.7% on the current stock price of $48.17. 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 check whether the dividend payments are covered, and if earnings are growing.
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. It paid out 78% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be concerned if earnings began to decline. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It distributed 33% of its free cash flow as dividends, a comfortable payout level for most companies.
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?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see Greif earnings per share are up 8.4% per annum over the last five years. While earnings have been growing at a credible rate, the company is paying out a majority of its earnings to shareholders. Therefore it's unlikely that the company will be able to reinvest heavily in its business, which could presage slower growth in the future.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Greif has lifted its dividend by approximately 1.5% a year on average.
The Bottom Line
Is Greif an attractive dividend stock, or better left on the shelf? Earnings per share growth has been modest and Greif paid out over half of its profits and less than half of its free cash flow, although both payout ratios are within normal limits. In summary, it's hard to get excited about Greif from a dividend perspective.
In light of that, while Greif has an appealing dividend, it's worth knowing the risks involved with this stock. We've identified 4 warning signs with Greif (at least 1 which doesn't sit too well with us), and understanding these should be part of your investment process.
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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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