How I analyze a Dividend Stock
Whenever I am looking at a potential dividend stock investment, I always check these 5 metrics:
- Is their annual yield among the top 25% of dividend payers? If not I’ll go elsewhere;
- Have they missed a payment in the past 10 years, or did they significantly reduce their per share payout?
- Have they increased their dividend per share amount over at least 10 years?
- Can they afford to pay the current rate with their earnings?
- Can afford to keep paying based on the future earnings growth
In the case where a company has been paying a dividend for less then 10 years I don’t think the stock is time tested enough to be considered a ‘pure dividend stock’. Rather I would include the dividend as part of a wider investment thesis. View our latest analysis for Novartis
Does Novartis pass our checks?
Novartis has a payout ratio of 96%, meaning the dividend is not sufficiently covered by earnings. Looking forward 3 years the analysts expect the dividends per share to be around $2.504 and EPS to increase to $4.55. This means they should be able to continue the dividend payout with an estimated future payout ratio of 55%.
If the dividend is a key criteria in your investment consideration, then you need to make sure the dividend stock you’re eyeing out is reliable. NVS has increased their DPS from $1.11 to $2.75 in the past 11 years. During this period they have not missed a payment, as expected for a company increasing their dividend.
Therefore everything is looking good for Novartis with its attractive yield of 3.7%, which is high for a pharma and biotech stock.
The Take Away
Novartis is on my radar as a suitable dividend investment. It might not be perfect, but nothing ever is. Despite the above criteria being relatively basic, it’s important that potential dividend stocks be checked against them, as they are fundamental checks for any serious income investor. On top of this, you should also be confident about the company’s core business and fundamentals.
No matter how great a company is, it is not worth an infite price. Is Novartis overvalued or is it actually available for a good price? I recommend you check our latest FREE analysis to find out! If you are not interested in NVS anymore check out my list of “Dividend Rock Stars” to see stocks that meet all the checks above.