Baxter International Inc.'s (NYSE:BAX) dividend will be increasing on the 1st of July to US$0.29, with investors receiving 3.6% more than last year. Based on the announced payment, the dividend yield for the company will be 1.5%, which is fairly typical for the industry.
Baxter International's Payment Has Solid Earnings Coverage
Unless the payments are sustainable, the dividend yield doesn't mean too much. Based on the last payment, Baxter International was quite comfortably earning enough to cover the dividend. This indicates that a lot of the earnings are being reinvested into the business, with the aim of fueling growth.
The next year is set to see EPS grow by 58.1%. Assuming the dividend continues along recent trends, we think the payout ratio could be 34% by next year, which is in a pretty sustainable range.
The company has a long dividend track record, but it doesn't look great with cuts in the past. The dividend has gone from US$1.24 in 2012 to the most recent annual payment of US$1.12. The dividend has shrunk at around 1.0% a year during that period. A company that decreases its dividend over time generally isn't what we are looking for.
Dividend Growth May Be Hard To Come By
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Baxter International has seen earnings per share falling at 9.2% per year over the last five years. A modest decline in earnings isn't great, and it makes it quite unlikely that the dividend will grow in the future unless that trend can be reversed. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this can turn into a longer term trend.
Our Thoughts On Baxter International's Dividend
In summary, while it's always good to see the dividend being raised, we don't think Baxter International's payments are rock solid. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. Overall, we don't think this company has the makings of a good income stock.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Case in point: We've spotted 3 warning signs for Baxter International (of which 1 is a bit unpleasant!) you should know about. Is Baxter International not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
Valuation is complex, but we're helping make it simple.
Find out whether Baxter International is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.