It looks like AbbVie Inc. (NYSE:ABBV) is about to go ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 14th of January will not receive this dividend, which will be paid on the 14th of February.
AbbVie’s next dividend payment will be US$1.18 per share, on the back of last year when the company paid a total of US$4.28 to shareholders. Based on the last year’s worth of payments, AbbVie stock has a trailing yield of around 5.3% on the current share price of $89.52. 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 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. AbbVie distributed an unsustainably high 197% of its profit as dividends to shareholders last year. Without extenuating circumstances, we’d consider the dividend at risk of a cut. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Thankfully its dividend payments took up just 48% of the free cash flow it generated, which is a comfortable payout ratio.
It’s good to see that while AbbVie’s dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we’d view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. So we’re not too excited that AbbVie’s earnings are down 3.3% a year over the past five years.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. In the past seven years, AbbVie has increased its dividend at approximately 17% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. AbbVie is already paying out 197% of its profits, and with shrinking earnings we think it’s unlikely that this dividend will grow quickly in the future.
Has AbbVie got what it takes to maintain its dividend payments? It’s not a great combination to see a company with earnings in decline and paying out 197% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in AbbVie’s cash flows, or perhaps the company has written down some assets aggressively, reducing its income. With the way things are shaping up from a dividend perspective, we’d be inclined to steer clear of AbbVie.
Wondering what the future holds for AbbVie? See what the eight analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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