Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Gilead Sciences, Inc. (NASDAQ:GILD) is about to go ex-dividend in just 4 days. This means that investors who purchase shares on or after the 11th of June will not receive the dividend, which will be paid on the 29th of June.
Gilead Sciences’s next dividend payment will be US$0.68 per share, on the back of last year when the company paid a total of US$2.72 to shareholders. Looking at the last 12 months of distributions, Gilead Sciences has a trailing yield of approximately 3.5% on its current stock price of $76.75. If you buy this business for its dividend, you should have an idea of whether Gilead Sciences’s dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
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. Gilead Sciences paid out more than half (66%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether Gilead Sciences generated enough free cash flow to afford its dividend. Fortunately, it paid out only 40% of its free cash flow in the past year.
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.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we’re concerned to see Gilead Sciences’s earnings per share have dropped 13% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Gilead Sciences has delivered an average of 9.6% per year annual increase in its dividend, based on the past five years of dividend payments. That’s interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company’s profits. This can be valuable for shareholders, but it can’t go on forever.
The Bottom Line
Is Gilead Sciences an attractive dividend stock, or better left on the shelf? We’re not enthused by the declining earnings per share, although at least the company’s payout ratio is within a reasonable range, meaning it may not be at imminent risk of a dividend cut. In summary, it’s hard to get excited about Gilead Sciences from a dividend perspective.
If you’re not too concerned about Gilead Sciences’s ability to pay dividends, you should still be mindful of some of the other risks that this business faces. Every company has risks, and we’ve spotted 2 warning signs for Gilead Sciences you should know about.
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.
Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email email@example.com.
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. Thank you for reading.