Packaging Corporation of America (NYSE:PKG) has announced that it will pay a dividend of $1.25 per share on the 15th of January. Based on this payment, the dividend yield will be 2.1%, which is fairly typical for the industry.

Check out our latest analysis for Packaging Corporation of America

Packaging Corporation of America's Projected Earnings Seem Likely To Cover Future Distributions

Solid dividend yields are great, but they only really help us if the payment is sustainable. The last dividend was quite comfortably covered by Packaging Corporation of America's earnings, but it was a bit tighter on the cash flow front. The business is earning enough to make the dividend feasible, but the cash payout ratio of 75% indicates it is more focused on returning cash to shareholders than growing the business.

The next year is set to see EPS grow by 43.9%. Assuming the dividend continues along recent trends, we think the payout ratio could be 45% by next year, which is in a pretty sustainable range.

Packaging Corporation of America Has A Solid Track Record

The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. The annual payment during the last 10 years was $1.60 in 2014, and the most recent fiscal year payment was $5.00. This means that it has been growing its distributions at 12% per annum 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

The company's investors will be pleased to have been receiving dividend income for some time. However, Packaging Corporation of America's EPS was effectively flat over the past five years, which could stop the company from paying more every year. Growth of 1.2% 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.

Our Thoughts On Packaging Corporation of America's Dividend

Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. The company hasn't been paying a very consistent dividend over time, despite only paying out a small portion of earnings. This company is not in the top tier of income providing stocks.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 1 warning sign for Packaging Corporation of America that investors need to be conscious of moving forward. Is Packaging Corporation of America not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.