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Neenah, Inc. (NYSE:NP) stock is about to trade ex-dividend in 3 days time. You will need to purchase shares before the 15th of August to receive the dividend, which will be paid on the 4th of September.
Neenah's next dividend payment will be US$0.45 per share, and in the last 12 months, the company paid a total of US$1.80 per share. Based on the last year's worth of payments, Neenah has a trailing yield of 2.7% on the current stock price of $67.45. If you buy this business for its dividend, you should have an idea of whether Neenah's dividend is reliable and sustainable. So we need to investigate whether Neenah can afford its dividend, and if the dividend could grow.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Neenah paid out 57% of its earnings to investors last year, a normal payout level for most businesses. 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. It distributed 46% of its free cash flow as dividends, a comfortable payout level 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.
Have Earnings And Dividends Been Growing?
Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings fall far enough, the company could be forced to cut its dividend. That explains why we're not overly excited about Neenah's flat earnings over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. Earnings per share growth has been slim, and the company is already paying out a majority of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Neenah has delivered an average of 16% per year annual increase in its dividend, based on the past 10 years of dividend payments.
From a dividend perspective, should investors buy or avoid Neenah? It's unfortunate that earnings per share have not grown, and we'd note that Neenah is paying out lower percentage of its cashflow than its profit, but overall the dividend looks well covered by earnings. In summary, it's hard to get excited about Neenah from a dividend perspective.
Ever wonder what the future holds for Neenah? See what the three analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.