Here's Why We're Wary Of Buying Raytheon Technologies' (NYSE:RTX) For Its Upcoming Dividend
Readers hoping to buy Raytheon Technologies Corporation (NYSE:RTX) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Meaning, you will need to purchase Raytheon Technologies' shares before the 18th of August to receive the dividend, which will be paid on the 8th of September.
The company's next dividend payment will be US$0.55 per share. Last year, in total, the company distributed US$2.20 to shareholders. Based on the last year's worth of payments, Raytheon Technologies stock has a trailing yield of around 2.3% on the current share price of $95.01. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Raytheon Technologies can afford its dividend, and if the dividend could grow.
See our latest analysis for Raytheon Technologies
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. Raytheon Technologies paid out 69% of its earnings to investors last year, a normal payout level for most businesses. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out more than half (71%) of its free cash flow in the past year, which is within an average range 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.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by Raytheon Technologies's 13% per annum decline in earnings in 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 past 10 years, Raytheon Technologies has increased its dividend at approximately 1.4% a year on average.
To Sum It Up
Is Raytheon Technologies an attractive dividend stock, or better left on the shelf? While earnings per share are shrinking, it's encouraging to see that at least Raytheon Technologies's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. It's not that we think Raytheon Technologies is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
So if you're still interested in Raytheon Technologies despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Case in point: We've spotted 1 warning sign for Raytheon Technologies you should be aware of.
Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.
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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