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Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Reynolds Consumer Products Inc. (NASDAQ:REYN) is about to go ex-dividend in just 3 days. Ex-dividend means that investors that purchase the stock on or after the 13th of November will not receive this dividend, which will be paid on the 30th of November.
Reynolds Consumer Products's next dividend payment will be US$0.22 per share, on the back of last year when the company paid a total of US$0.88 to shareholders. Calculating the last year's worth of payments shows that Reynolds Consumer Products has a trailing yield of 2.9% on the current share price of $30.12. 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 Reynolds Consumer Products 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. Reynolds Consumer Products paid out just 23% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. 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 paid out 15% of its free cash flow as dividends last year, which is conservatively low.
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?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why we're optimistic about Reynolds Consumer Products's earnings, which have ripped higher, up 25% over the past year. While we'd be remiss not to point out that a year is a very short time in dividend investing, it's an encouraging sign so far. With earnings per share growing rapidly and the company sensibly reinvesting almost all of its profits within the business, Reynolds Consumer Products looks like a promising growth company.
One year is not very long in the grand scheme of things though, so we wouldn't draw too strong a conclusion based on these results.
We'd also point out that Reynolds Consumer Products issued a meaningful number of new shares in the past year. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.
Given that Reynolds Consumer Products has only been paying a dividend for a year, there's not much of a past history to draw insight from.
To Sum It Up
Is Reynolds Consumer Products an attractive dividend stock, or better left on the shelf? We love that Reynolds Consumer Products is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. Reynolds Consumer Products looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. To that end, you should learn about the 2 warning signs we've spotted with Reynolds Consumer Products (including 1 which makes us a bit uncomfortable).
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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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