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Schweitzer-Mauduit International, Inc. (NYSE:SWM) has announced that it will pay a dividend of US$0.44 per share on the 24th of September. The dividend yield will be 4.4% based on this payment which is still above the industry average.
Schweitzer-Mauduit International's Payment Has Solid Earnings Coverage
We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, Schweitzer-Mauduit International's dividend was only 58% of earnings, however it was paying out 2,513% of free cash flows. The company might be more focused on returning cash to shareholders, but paying out this much of its cash flow could expose the dividend to being cut in the future.
Over the next year, EPS is forecast to expand by 110.0%. If the dividend continues along recent trends, we estimate the payout ratio will be 56%, which is in the range that makes us comfortable with the sustainability of the dividend.
Schweitzer-Mauduit International Has A Solid Track Record
The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. The dividend has gone from US$0.30 in 2011 to the most recent annual payment of US$1.76. This works out to be a compound annual growth rate (CAGR) of approximately 19% a year over that time. Rapidly growing dividends for a long time is a very valuable feature for an income stock.
Dividend Growth Potential Is Shaky
Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Unfortunately things aren't as good as they seem. Over the past five years, it looks as though Schweitzer-Mauduit International's EPS has declined at around 13% a year. Dividend payments are likely to come under some pressure unless EPS can pull out of the nosedive it is in. Over the next year, however, earnings are actually predicted to rise, but we would still be cautious until a track record of earnings growth can be built.
Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. While Schweitzer-Mauduit International is earning enough to cover the payments, the cash flows are lacking. We would be a touch cautious of relying on this stock primarily for the dividend income.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Just as an example, we've come across 2 warning signs for Schweitzer-Mauduit International you should be aware of, and 1 of them can't be ignored. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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.
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