It looks like International Paper Company (NYSE:IP) is about to go ex-dividend in the next 4 days. Investors can purchase shares before the 26th of May in order to be eligible for this dividend, which will be paid on the 15th of June.
International Paper's next dividend payment will be US$0.51 per share, on the back of last year when the company paid a total of US$2.05 to shareholders. Based on the last year's worth of payments, International Paper has a trailing yield of 6.2% on the current stock price of $33. If you buy this business for its dividend, you should have an idea of whether International Paper's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. International Paper distributed an unsustainably high 121% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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. Thankfully its dividend payments took up just 35% of the free cash flow it generated, which is a comfortable payout ratio.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and International Paper fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at International Paper, with earnings per share up 4.8% on average over the last five years.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. International Paper has delivered 35% dividend growth per year on average over the past ten years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
To Sum It Up
Should investors buy International Paper for the upcoming dividend? International Paper has been steadily growing its earnings per share, and it is paying out just 35% of its cash flow but an uncomfortably high 121% of its income. To summarise, International Paper looks okay on this analysis, although it doesn't appear a stand-out opportunity.
If you're not too concerned about International Paper's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. For example, we've found 5 warning signs for International Paper that we recommend you consider before investing in the business.
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.
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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. 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. Thank you for reading.