Dividend Investors: Don't Be Too Quick To Buy International Paper Company (NYSE:IP) For Its Upcoming Dividend
Readers hoping to buy International Paper Company (NYSE:IP) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 13th of November, you won’t be eligible to receive this dividend, when it is paid on the 15th of December.
International Paper’s next dividend payment will be US$0.51 per share, and in the last 12 months, the company paid a total of US$2.05 per share. Last year’s total dividend payments show that International Paper has a trailing yield of 4.4% on the current share price of $46.49. If you buy this business for its dividend, you should have an idea of whether International Paper’s dividend is reliable and sustainable. That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.
See our latest analysis for International Paper
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. International Paper distributed an unsustainably high 163% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether International Paper generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 37% 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. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. 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 explains why we’re not overly excited about International Paper’s flat earnings over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.
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 10 years.
To Sum It Up
From a dividend perspective, should investors buy or avoid International Paper? Along with flat earnings per share, International Paper paid out an uncomfortably high percentage of its earnings. It paid out a lower percentage of its free cash flow. With the way things are shaping up from a dividend perspective, we’d be inclined to steer clear of International Paper.
Although, if you’re still interested in International Paper and want to know more, you’ll find it very useful to know what risks this stock faces. In terms of investment risks, we’ve identified 4 warning signs with International Paper and understanding them should be part of your investment process.
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.
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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