Novartis (VTX:NOVN) Has Announced A Dividend Of CHF3.30

The board of Novartis AG ( VTX:NOVN ) has announced that it will pay a dividend on the 11th of March, with investors receiving CHF3.30 per share. This will take the annual payment to 3.7% of the stock price, which is above what most companies in the industry pay.

View our latest analysis for Novartis

Novartis Is Paying Out More Than It Is Earning

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, Novartis' dividend made up quite a large proportion of earnings but only 56% of free cash flows. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.

Earnings per share is forecast to rise by 64.5% over the next year. If the dividend continues on its recent course, the payout ratio in 12 months could be 121%, which is a bit high and could start applying pressure to the balance sheet.

Novartis Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. The annual payment during the last 10 years was $2.35 in 2014, and the most recent fiscal year payment was $3.72. This implies that the company grew its distributions at a yearly rate of about 4.7% over that duration. Although we can't deny that the dividend has been remarkably stable in the past, the growth has been pretty muted.

Dividend Growth Is Doubtful

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Let's not jump to conclusions as things might not be as good as they appear on the surface. Over the past five years, it looks as though Novartis' EPS has declined at around 5.3% a year. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The company is generating plenty of cash, but we still think the dividend is a bit high for comfort. This company is not in the top tier of income providing stocks.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 2 warning signs for Novartis that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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