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Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Reynolds Consumer Products Inc. (NASDAQ:REYN) is about to trade ex-dividend in the next four days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled 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. Thus, you can purchase Reynolds Consumer Products' shares before the 16th of August in order to receive the dividend, which the company will pay on the 31st of August.
The company's next dividend payment will be US$0.23 per share. Last year, in total, the company distributed US$0.92 to shareholders. Based on the last year's worth of payments, Reynolds Consumer Products has a trailing yield of 3.1% on the current stock price of $29.22. If you buy this business for its dividend, you should have an idea of whether Reynolds Consumer Products's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Reynolds Consumer Products is paying out an acceptable 50% of its profit, a common payout level among most companies. 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. Over the past year it paid out 111% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.
While Reynolds Consumer Products's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Reynolds Consumer Products's ability to maintain its dividend.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. So we're not too excited that Reynolds Consumer Products's earnings are down 2.4% a year over the past five years.
Unfortunately Reynolds Consumer Products has only been paying a dividend for a year or so, so there's not much of a history to draw insight from.
The Bottom Line
Should investors buy Reynolds Consumer Products for the upcoming dividend? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Reynolds Consumer Products.
With that in mind though, if the poor dividend characteristics of Reynolds Consumer Products don't faze you, it's worth being mindful of the risks involved with this business. For instance, we've identified 2 warning signs for Reynolds Consumer Products (1 doesn't sit too well with us) you should be aware of.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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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