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International Paper Company (NYSE:IP) stock is about to trade ex-dividend in 4 days. This means that investors who purchase shares on or after the 17th of February will not receive the dividend, which will be paid on the 15th of March.
International Paper's next dividend payment will be US$0.51 per share. Last year, in total, the company distributed US$2.05 to shareholders. Calculating the last year's worth of payments shows that International Paper has a trailing yield of 4.3% on the current share price of $48.17. If you buy this business for its dividend, you should have an idea of whether International Paper's dividend is reliable and sustainable. So we need to investigate whether International Paper can afford its dividend, and if the dividend could grow.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. International Paper distributed an unsustainably high 167% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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. Fortunately, it paid out only 35% of its free cash flow in the past year.
It's good to see that while International Paper's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see International Paper's earnings per share have dropped 9.7% a year over the past 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, International Paper has lifted its dividend by approximately 18% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. International Paper is already paying out 167% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
Has International Paper got what it takes to maintain its dividend payments? It's never great to see earnings per share declining, especially when a company is paying out 167% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
So if you're still interested in International Paper despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Our analysis shows 5 warning signs for International Paper and you should be aware of these before buying any shares.
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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