Here’s why we’re reluctant to buy Sonoco (NYSE: SON) products for its next dividend

Some investors rely on dividends to grow their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Sonoco products company (NYSE: SON) is set to be ex-dividend in just 4 days. The ex-dividend date is a business day before a company’s registration date, which is the date the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any share transaction must have been settled before the registration date to be eligible for a dividend. In other words, investors can buy shares of Sonoco Products before November 9 in order to be eligible for the dividend, which will be paid on December 10.

The company’s next dividend payment will be US $ 0.45 per share. Last year, in total, the company distributed US $ 1.80 to shareholders. Based on the value of last year’s payouts, Sonoco Products has a rolling 3.1% return on the current share price of $ 58.94. Dividends are an important source of income for many shareholders, but the health of the business is crucial to sustaining these dividends. So we need to determine if Sonoco Products can afford its dividend and if the dividend could increase.

Check out our latest review for Sonoco products

Dividends are generally paid out of company profits. If a company pays more dividends than it made a profit, then the dividend could be unsustainable. Sonoco Products dividend is not well covered by earnings as the company lost money last year. This is not a sustainable situation, so it would be worth investigating whether profits are expected to pick up. Since the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If the cash income does not cover the dividend, the company would have to pay dividends in cash to the bank or by borrowing money, which is not sustainable in the long run. It paid 87% of its free cash flow in the form of dividends, which is within usual limits but will limit the company’s ability to raise the dividend if there is no growth.

Click here to view the company’s payout ratio, as well as analysts’ estimates of its future dividends.

Historic NYSE dividend: SON November 4, 2021

Have profits and dividends increased?

Companies with declining profits are tricky from a dividend standpoint. If profits fall enough, the company could be forced to cut its dividend. Sonoco Products reported a loss last year, and the general trend suggests that its profits have also declined in recent years, which makes us wonder if the dividend is in jeopardy.

Most investors primarily assess a company’s dividend prospects by checking the historical rate of dividend growth. Sonoco Products has generated an average annual increase of 4.9% per annum in its dividend, based on dividend payments over the past 10 years.

Remember, you can still get an overview of Sonoco Products’ financial health, by viewing our visualization of their financial health, here.

The bottom line

From a dividend perspective, should investors buy or avoid Sonoco products? First of all, it’s not great to see the company paying a dividend when it has been in deficit for the past year. On the positive side, the dividend was covered by free cash flow. It’s not that we think Sonoco Products is a bad company, but these characteristics don’t generally lead to outstanding dividend performance.

That said, if you look at this stock without worrying too much about the dividend, you should still be aware of the risks associated with Sonoco products. For example – Sonoco Products has 3 warning signs we think you should be aware.

If you are in the dividend-paying stock market, we recommend that you check out our list of the highest dividend-paying stocks with a yield above 2% and a future dividend.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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