The board of Royalty Pharma plc (NASDAQ:RPRX) has announced that it will be paying its dividend of $0.20 on the 15th of June, an increased payment from last year's comparable dividend. This takes the annual payment to 2.2% of the current stock price, which is about average for the industry.
Royalty Pharma's Dividend Is Well Covered By Earnings
We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Based on the last payment, the company wasn't making enough to cover what it was paying to shareholders. It will be difficult to sustain this level of payout so we wouldn't be confident about this continuing.
Over the next year, EPS is forecast to fall by 100.0%. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be , which is an improvement from where it is currently.
Royalty Pharma Is Still Building Its Track Record
Looking back, the dividend has been stable, but the company hasn't been paying a dividend for very long so we can't be confident that the dividend will remain stable through all economic environments. The annual payment during the last 3 years was $0.60 in 2020, and the most recent fiscal year payment was $0.80. This means that it has been growing its distributions at 10% per annum over that time. The dividend has been growing rapidly, however with such a short payment history we can't know for sure if payment can continue to grow over the long term, so caution may be warranted.
Dividend Growth Potential Is Shaky
Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Unfortunately things aren't as good as they seem. EPS has fallen over the last year, with this year's number 93% below last year. Reduced dividend payments are a common consequence of declining earnings. We do note though, one year is too short a time to be drawing strong conclusions about a company's future prospects.
Royalty Pharma's Dividend Doesn't Look Great
Overall, while the dividend being raised can be good, there are some concerns about its long term sustainability. The company's earnings aren't high enough to be making such big distributions, and it isn't backed up by strong growth or consistency either. We don't think that this is a great candidate to be an income stock.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Case in point: We've spotted 5 warning signs for Royalty Pharma (of which 1 can't be ignored!) you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
What are the risks and opportunities for Royalty Pharma?
Trading at 74.7% below our estimate of its fair value
Earnings are forecast to grow 88.07% per year
Profit margins (7.9%) are lower than last year (22.6%)
Large one-off items impacting financial results
Has a high level of debt
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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.