Zimmer Biomet Holdings (NYSE:ZBH) Will Pay A Dividend Of US$0.24

The board of Zimmer Biomet Holdings, Inc. (NYSE:ZBH) has announced that it will pay a dividend of US$0.24 per share on the 29th of July. This makes the dividend yield 4.0%, which will augment investor returns quite nicely.

See our latest analysis for Zimmer Biomet Holdings

Zimmer Biomet Holdings Is Paying Out More Than It Is Earning

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Zimmer Biomet Holdings' dividend made up quite a large proportion of earnings but only 20% of free cash flows. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.

The next 12 months is set to see EPS grow by 156.4%. If the dividend continues on its recent course, the payout ratio in 12 months could be 140%, which is a bit high and could start applying pressure to the balance sheet.

Zimmer Biomet Holdings Has A Solid Track Record

The company has an extended history of paying stable dividends. Since 2012, the first annual payment was US$0.72, compared to the most recent full-year payment of US$0.96. This means that it has been growing its distributions at 2.9% per annum over that time. Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.

Dividend Growth Potential Is Shaky

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Unfortunately things aren't as good as they seem. Earnings per share has been sinking by 12% over the last five years. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future. Over the next year, however, earnings are actually predicted to rise, but we would still be cautious until a track record of earnings growth can be built.

Our Thoughts On Zimmer Biomet Holdings' Dividend

Overall, a consistent dividend is a good thing, and we think that Zimmer Biomet Holdings has the ability to continue this into the future. The earnings coverage is acceptable for now, but with earnings on the decline we would definitely keep an eye on the payout ratio. Taking all of this into consideration, the dividend looks viable moving forward, but investors should be mindful that the company has pushed the boundaries of sustainability in the past and may do so again.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 3 warning signs for Zimmer Biomet Holdings that you should be aware of before investing. Is Zimmer Biomet Holdings not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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