Royalty Pharma (NASDAQ:RPRX) Will Pay A Dividend Of $0.21

Royalty Pharma plc (NASDAQ:RPRX) will pay a dividend of $0.21 on the 14th of June. Based on this payment, the dividend yield on the company's stock will be 3.0%, which is an attractive boost to shareholder returns.

See our latest analysis for Royalty Pharma

Royalty Pharma's Earnings Easily Cover The Distributions

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before making this announcement, Royalty Pharma was easily earning enough to cover the dividend. This means that most of its earnings are being retained to grow the business.

The next year is set to see EPS grow by 17.1%. If the dividend continues along recent trends, we estimate the payout ratio will be 37%, which is in the range that makes us comfortable with the sustainability of the dividend.

Royalty Pharma Is Still Building Its Track Record

The dividend hasn't seen any major cuts in the past, but the company has only been paying a dividend for 4 years, which isn't that long in the grand scheme of things. Since 2020, the annual payment back then was $0.60, compared to the most recent full-year payment of $0.84. This implies that the company grew its distributions at a yearly rate of about 8.8% over that duration. Royalty Pharma has a nice track record of dividend growth but we would wait until we see a longer track record before getting too confident.

The Dividend Has Limited Growth Potential

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. Royalty Pharma's EPS has fallen by approximately 42% per year during the past five years. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

In Summary

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Royalty Pharma's payments, as there could be some issues with sustaining them into the future. 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. We would probably look elsewhere for an income investment.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. As an example, we've identified 3 warning signs for Royalty Pharma that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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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.