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 Amcor plc (ASX:AMC) is about to go ex-dividend in just 4 days. If you purchase the stock on or after the 27th of May, you won’t be eligible to receive this dividend, when it is paid on the 17th of June.
Amcor’s next dividend payment will be AU$0.12 per share, on the back of last year when the company paid a total of AU$0.46 to shareholders. Last year’s total dividend payments show that Amcor has a trailing yield of 4.8% on the current share price of A$14.53. If you buy this business for its dividend, you should have an idea of whether Amcor’s dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
See our latest analysis for Amcor
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. Amcor paid out a disturbingly high 234% of its profit as dividends last year, which makes us concerned there’s something we don’t fully understand in the business. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the past year it paid out 128% of its free cash flow as dividends, which is uncomfortably high. It’s hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we’d wonder how the company justifies this payout level.
Cash is slightly more important than profit from a dividend perspective, but given Amcor’s payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we’re discomforted by Amcor’s 9.5% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. In the last ten years, Amcor has lifted its dividend by approximately 5.0% a year on average. That’s intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Amcor is already paying out 234% of its profits, and with shrinking earnings we think it’s unlikely that this dividend will grow quickly in the future.
The Bottom Line
Should investors buy Amcor for the upcoming dividend? Not only are earnings per share declining, but Amcor is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company’s near future. It’s not an attractive combination from a dividend perspective, and we’re inclined to pass on this one for the time being.
With that in mind though, if the poor dividend characteristics of Amcor don’t faze you, it’s worth being mindful of the risks involved with this business. To help with this, we’ve discovered 4 warning signs for Amcor (1 can’t be ignored!) that you ought to be aware of before buying the shares.
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.
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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.