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It Might Not Be A Great Idea To Buy Amcor plc (ASX:AMC) For Its Next Dividend

Simply Wall St

Readers hoping to buy Amcor plc (ASX:AMC) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 27th of November to receive the dividend, which will be paid on the 17th of December.

Amcor's upcoming dividend is AU$0.17 a share, following on from the last 12 months, when the company distributed a total of AU$0.48 per share to shareholders. Last year's total dividend payments show that Amcor has a trailing yield of 4.8% on the current share price of A$14.81. 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 Amcor can afford its dividend, and if the dividend could grow.

See our latest analysis for Amcor

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Amcor distributed an unsustainably high 185% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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. The company paid out 101% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

As Amcor's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

ASX:AMC Historical Dividend Yield, November 22nd 2019
ASX:AMC Historical Dividend Yield, November 22nd 2019

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. Amcor's earnings per share have fallen at approximately 11% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Amcor has delivered an average of 8.4% per year annual increase in its dividend, based on the past ten years of dividend payments. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Amcor is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

Final Takeaway

Has Amcor got what it takes to maintain its dividend payments? Not only are earnings per share declining, but Amcor is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. It's not that we think Amcor is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Wondering what the future holds for Amcor? See what the ten 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.

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.

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. Thank you for reading.