Dividend Investors: Don't Be Too Quick To Buy AmerisourceBergen Corporation (NYSE:ABC) For Its Upcoming Dividend

By
Simply Wall St
Published
November 08, 2020
NYSE:ABC

AmerisourceBergen Corporation (NYSE:ABC) stock is about to trade ex-dividend in 4 days. Investors can purchase shares before the 13th of November in order to be eligible for this dividend, which will be paid on the 30th of November.

AmerisourceBergen's next dividend payment will be US$0.44 per share. Last year, in total, the company distributed US$1.76 to shareholders. Calculating the last year's worth of payments shows that AmerisourceBergen has a trailing yield of 1.7% on the current share price of $103.95. If you buy this business for its dividend, you should have an idea of whether AmerisourceBergen's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for AmerisourceBergen

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. AmerisourceBergen paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Luckily it paid out just 19% of its free cash flow last year.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
NYSE:ABC Historic Dividend November 8th 2020

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. AmerisourceBergen reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. AmerisourceBergen has delivered an average of 19% per year annual increase in its dividend, based on the past 10 years of dividend payments.

Remember, you can always get a snapshot of AmerisourceBergen's financial health, by checking our visualisation of its financial health, here.

To Sum It Up

Should investors buy AmerisourceBergen for the upcoming dividend? We're a bit uncomfortable with it paying a dividend while being loss-making. However, we note that the dividend was covered by cash flow. Bottom line: AmerisourceBergen has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that being said, if you're still considering AmerisourceBergen as an investment, you'll find it beneficial to know what risks this stock is facing. For example - AmerisourceBergen has 2 warning signs we think you should be aware of.

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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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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