Do These 3 Checks Before Buying Royalty Pharma plc (NASDAQ:RPRX) For Its Upcoming Dividend

By
Simply Wall St
Published
May 14, 2022
NasdaqGS:RPRX
Source: Shutterstock

Royalty Pharma plc (NASDAQ:RPRX) stock is about to trade ex-dividend in 4 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. In other words, investors can purchase Royalty Pharma's shares before the 19th of May in order to be eligible for the dividend, which will be paid on the 15th of June.

The company's next dividend payment will be US$0.19 per share, and in the last 12 months, the company paid a total of US$0.76 per share. Looking at the last 12 months of distributions, Royalty Pharma has a trailing yield of approximately 1.9% on its current stock price of $39.94. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Royalty Pharma can afford its dividend, and if the dividend could grow.

View our latest analysis for Royalty Pharma

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. That's why it's good to see Royalty Pharma paying out a modest 49% of its earnings. 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. Over the past year it paid out 115% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Royalty Pharma paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Royalty Pharma's ability to maintain its dividend.

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

historic-dividend
NasdaqGS:RPRX Historic Dividend May 14th 2022

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Royalty Pharma's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 70% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Royalty Pharma has delivered 13% dividend growth per year on average over the past two years.

To Sum It Up

Is Royalty Pharma an attractive dividend stock, or better left on the shelf? It's disappointing to see earnings per share declining, and this would ordinarily be enough to discourage us from most dividend stocks, even though Royalty Pharma is paying out less than half its income as dividends. However, it's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Royalty Pharma.

Although, if you're still interested in Royalty Pharma and want to know more, you'll find it very useful to know what risks this stock faces. For example, we've found 3 warning signs for Royalty Pharma that we recommend you consider before investing in the business.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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