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Keurig Dr Pepper Inc. (NYSE:KDP) stock is about to trade ex-dividend in 4 days time. Investors can purchase shares before the 3rd of October in order to be eligible for this dividend, which will be paid on the 18th of October.
Keurig Dr Pepper's next dividend payment will be US$0.1 per share, and in the last 12 months, the company paid a total of US$0.6 per share. Based on the last year's worth of payments, Keurig Dr Pepper has a trailing yield of 2.2% on the current stock price of $27. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Keurig Dr Pepper can afford its dividend, and if the dividend could grow.
See our latest analysis for Keurig Dr Pepper
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. It paid out 87% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be worried about the risk of a drop in earnings. A useful secondary check can be to evaluate whether Keurig Dr Pepper generated enough free cash flow to afford its dividend. It distributed 32% of its free cash flow as dividends, a comfortable payout level for most companies.
It's positive to see that Keurig Dr Pepper's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Keurig Dr Pepper's earnings per share have fallen at approximately 28% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Keurig Dr Pepper also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. It's hard to grow dividends per share when a company keeps creating new shares.
Unfortunately Keurig Dr Pepper has only been paying a dividend for a year or so, so there's not much of a history to draw insight from.
The Bottom Line
Has Keurig Dr Pepper got what it takes to maintain its dividend payments? The payout ratios are within a reasonable range, implying the dividend may be sustainable. Declining earnings are a serious concern, however, and could pose a threat to the dividend in future. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Keurig Dr Pepper's dividend merits.