H. Lundbeck A/S (CPH:LUN) stock is about to trade ex-dividend in 3 days. You can purchase shares before the 24th of March in order to receive the dividend, which the company will pay on the 26th of March.
H. Lundbeck's next dividend payment will be kr.2.50 per share, on the back of last year when the company paid a total of kr.2.50 to shareholders. Based on the last year's worth of payments, H. Lundbeck has a trailing yield of 1.1% on the current stock price of DKK231.7. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether H. Lundbeck has been able to grow its dividends, or if the dividend might be cut.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Fortunately H. Lundbeck's payout ratio is modest, at just 31% of profit. A useful secondary check can be to evaluate whether H. Lundbeck generated enough free cash flow to afford its dividend. It paid out 24% of its free cash flow as dividends last year, which is conservatively low.
It's positive to see that H. Lundbeck'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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's comforting to see H. Lundbeck's earnings have been skyrocketing, up 38% per annum for the past five years. H. Lundbeck is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. 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.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. H. Lundbeck has seen its dividend decline 2.0% per annum on average over the past 10 years, which is not great to see. H. Lundbeck is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
The Bottom Line
Is H. Lundbeck worth buying for its dividend? H. Lundbeck has grown its earnings per share while simultaneously reinvesting in the business. Unfortunately it's cut the dividend at least once in the past 10 years, but the conservative payout ratio makes the current dividend look sustainable. It's a promising combination that should mark this company worthy of closer attention.
So while H. Lundbeck looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. For example - H. Lundbeck has 3 warning signs we think you should be aware of.
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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This article by Simply Wall St is general in nature. 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.
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