The board of Reynolds Consumer Products Inc. (NASDAQ:REYN) has announced that it will pay a dividend of $0.23 per share on the 31st of August. This means the annual payment is 3.3% of the current stock price, which is above the average for the industry.
Reynolds Consumer Products' Earnings Easily Cover The Distributions
A big dividend yield for a few years doesn't mean much if it can't be sustained. Before making this announcement, Reynolds Consumer Products was paying out quite a large proportion of both earnings and cash flow, with the dividend being 96% of cash flows. Paying out such a high proportion of cash flows certainly exposes the company to cutting the dividend if cash flows were to reduce.
The next year is set to see EPS grow by 55.9%. If the dividend continues along recent trends, we estimate the payout ratio will be 64%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.
Reynolds Consumer Products Doesn't Have A Long Payment History
The company has maintained a consistent dividend for a few years now, but we would like to see a longer track record before relying on it. Since 2020, the annual payment back then was $0.60, compared to the most recent full-year payment of $0.92. This works out to be a compound annual growth rate (CAGR) of approximately 15% a year over that time. The dividend has been growing rapidly, however with such a short payment history we can't know for sure if payment can continue to grow over the long term, so caution may be warranted.
Dividend Growth Potential Is Shaky
The company's investors will be pleased to have been receiving dividend income for some time. However, things aren't all that rosy. Reynolds Consumer Products' EPS has fallen by approximately 10% per year during the past five years. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this becomes a long term trend.
Reynolds Consumer Products' Dividend Doesn't Look Sustainable
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Reynolds Consumer Products' payments, as there could be some issues with sustaining them into the future. The track record isn't great, and the payments are a bit high to be considered sustainable. This company is not in the top tier of income providing stocks.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've identified 2 warning signs for Reynolds Consumer Products (1 doesn't sit too well with us!) that you should be aware of before investing. Is Reynolds Consumer Products not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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