Stock Analysis

Baxter International (NYSE:BAX) Could Be A Buy For Its Upcoming Dividend

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NYSE:BAX
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Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Baxter International Inc. (NYSE:BAX) is about to trade ex-dividend in the next four days. You can purchase shares before the 25th of February in order to receive the dividend, which the company will pay on the 1st of April.

Baxter International's next dividend payment will be US$0.24 per share, and in the last 12 months, the company paid a total of US$0.98 per share. Based on the last year's worth of payments, Baxter International has a trailing yield of 1.2% on the current stock price of $78.44. 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 Baxter International has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Baxter International

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. Baxter International paid out a comfortable 44% of its profit last year. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It distributed 41% of its free cash flow as dividends, a comfortable payout level for most companies.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

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NYSE:BAX Historic Dividend February 20th 2021

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. It's encouraging to see Baxter International has grown its earnings rapidly, up 25% a year 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. Companies with growing earnings and low payout ratios are often the best long-term dividend stocks, as the company can both grow its earnings and increase the percentage of earnings that it pays out, essentially multiplying the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Baxter International has seen its dividend decline 1.7% per annum on average over the past 10 years, which is not great to see.

The Bottom Line

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.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. For example, we've found 2 warning signs for Baxter International that we recommend you consider before investing in the business.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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