Baxter International Inc. (NYSE:BAX) is about to trade ex-dividend in the next 3 days. You will need to purchase shares before the 29th of August to receive the dividend, which will be paid on the 1st of October.
Baxter International’s next dividend payment will be US$0.22 per share, on the back of last year when the company paid a total of US$0.88 to shareholders. Based on the last year’s worth of payments, Baxter International has a trailing yield of 1.0% on the current stock price of $85.03. If you buy this business for its dividend, you should have an idea of whether Baxter International’s dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. That’s why it’s good to see Baxter International paying out a modest 26% of its earnings. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Fortunately, it paid out only 38% of its free cash flow in the past year.
It’s positive to see that Baxter International’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.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That’s why it’s comforting to see Baxter International’s earnings have been skyrocketing, up 39% per annum for the past five years. Earnings per share have been growing very quickly, and the company is paying out a relatively low percentage of its profit and cash flow. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Baxter International’s dividend payments per share have declined at 1.7% per year on average over the past 10 years, which is uninspiring.
Has Baxter International got what it takes to maintain its dividend payments? It’s great that Baxter International is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It’s disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. It’s a promising combination that should mark this company worthy of closer attention.
Wondering what the future holds for Baxter International? See what the 17 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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