The board of Packaging Corporation of America (NYSE:PKG) has announced that it will pay a dividend of $1.25 per share on the 15th of April. This payment means that the dividend yield will be 2.3%, which is around the industry average.
Packaging Corporation of America’s Payment Could Potentially Have Solid Earnings Coverage
We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Packaging Corporation of America was earning enough to cover the previous dividend, but it was paying out quite a large proportion of its free cash flows. The company is clearly earning enough to pay this type of dividend, but it is definitely focused on returning cash to shareholders, rather than growing the business.
The next year is set to see EPS grow by 39.5%. If the dividend continues along recent trends, we estimate the payout ratio will be 44%, which is in the range that makes us comfortable with the sustainability of the dividend.
Packaging Corporation of America Has A Solid Track Record
The company has a sustained record of paying dividends with very little fluctuation. The dividend has gone from an annual total of $1.60 in 2015 to the most recent total annual payment of $5.00. This works out to be a compound annual growth rate (CAGR) of approximately 12% a year over that time. We can see that payments have shown some very nice upward momentum without faltering, which provides some reassurance that future payments will also be reliable.
Packaging Corporation of America May Find It Hard To Grow The Dividend
Investors could be attracted to the stock based on the quality of its payment history. However, Packaging Corporation of America has only grown its earnings per share at 4.0% per annum over the past five years. Growth of 4.0% per annum is not particularly high, which might explain why the company is paying out a higher proportion of earnings. This could mean the dividend doesn’t have the growth potential we look for going into the future.
In Summary
Overall, we don’t think this company makes a great dividend stock, even though the dividend wasn’t cut this year. While Packaging Corporation of America is earning enough to cover the dividend, we are generally unimpressed with its future prospects. Overall, we don’t think this company has the makings of a good income stock.
It’s important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. As an example, we’ve identified 1 warning sign for Packaging Corporation of America that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.