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Is Graphic Packaging Holding Company (NYSE:GPK) A Smart Pick For Income Investors?

Simply Wall St

A sizeable part of portfolio returns can be produced by dividend stocks due to their contribution to compounding returns in the long run. Graphic Packaging Holding Company (NYSE:GPK) has recently paid dividends to shareholders, and currently yields 2.4%. Let's dig deeper into whether Graphic Packaging Holding should have a place in your portfolio.

View our latest analysis for Graphic Packaging Holding

5 questions I ask before picking a dividend stock

When researching a dividend stock, I always follow the following screening criteria:

  • Is its annual yield among the top 25% of dividend-paying companies?
  • Has it consistently paid a stable dividend without missing a payment or drastically cutting payout?
  • Has dividend per share risen in the past couple of years?
  • Can it afford to pay the current rate of dividends from its earnings?
  • Will it have the ability to keep paying its dividends going forward?
NYSE:GPK Historical Dividend Yield, April 10th 2019

Does Graphic Packaging Holding pass our checks?

The current trailing twelve-month payout ratio for the stock is 42%, which means that the dividend is covered by earnings. However, going forward, analysts expect GPK's payout to fall to 38% of its earnings. Assuming a constant share price, this equates to a dividend yield of around 2.7%. However, EPS should increase to $0.85, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.

When assessing the forecast sustainability of a dividend it is also worth considering the cash flow of the business. Companies with strong cash flow can sustain a higher payout ratio, while companies with weaker cash flow generally cannot.

If dividend is a key criteria in your investment consideration, then you need to make sure the dividend stock you're eyeing out is reliable in its payments. Unfortunately, it is really too early to view Graphic Packaging Holding as a dividend investment. It has only been consistently paying dividends for 4 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.

Relative to peers, Graphic Packaging Holding generates a yield of 2.4%, which is on the low-side for Packaging stocks.

Next Steps:

Taking all the above into account, Graphic Packaging Holding is a complicated pick for dividend investors given that there are a couple of positive things about it as well as negative. However, if you are not strictly just a dividend investor, the stock could still offer some interesting investment opportunities. Given that this is purely a dividend analysis, you should always research extensively before deciding whether or not a stock is an appropriate investment for you. I always recommend analysing the company's fundamentals and underlying business before making an investment decision. There are three fundamental factors you should further examine:

  1. Future Outlook: What are well-informed industry analysts predicting for GPK’s future growth? Take a look at our free research report of analyst consensus for GPK’s outlook.
  2. Valuation: What is GPK worth today? Even if the stock is a cash cow, it's not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether GPK is currently mispriced by the market.
  3. Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.