Don't Race Out To Buy Amcor plc (NYSE:AMCR) Just Because It's Going Ex-Dividend

Amcor plc (NYSE:AMCR) is about to trade ex-dividend in the next four days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a 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. In other words, investors can purchase Amcor's shares before the 23rd of May in order to be eligible for the dividend, which will be paid on the 20th of June.

The company's next dividend payment will be US$0.12 per share, and in the last 12 months, the company paid a total of US$0.49 per share. Based on the last year's worth of payments, Amcor has a trailing yield of 4.8% on the current stock price of $10.25. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Amcor has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Amcor

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Amcor paid out more than half (74%) of its earnings last year, which is a regular payout ratio for most companies. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. The company paid out 98% 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.

Amcor paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Amcor's ability to maintain its dividend.

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

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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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at Amcor, with earnings per share up 6.6% on average over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Amcor has delivered 0.5% dividend growth per year on average over the past four years.

To Sum It Up

From a dividend perspective, should investors buy or avoid Amcor? Amcor is paying out a reasonable percentage of its income and an uncomfortably high 98% of its cash flow as dividends. At least earnings per share have been growing steadily. Bottom line: Amcor has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Although, if you're still interested in Amcor and want to know more, you'll find it very useful to know what risks this stock faces. For example, we've found 2 warning signs for Amcor (1 is significant!) that deserve your attention before investing in the shares.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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