Royalty Pharma plc's (NASDAQ:RPRX) dividend will be increasing to US$0.19 on 15th of March. Despite this raise, the dividend yield of 1.6% is only a modest boost to shareholder returns.
Royalty Pharma's Dividend Is Well Covered By Earnings
If it is predictable over a long period, even low dividend yields can be attractive. Royalty Pharma is quite easily earning enough to cover the dividend, however it is being let down by weak cash flows. With the company not bringing in any cash, paying out to shareholders is bound to become difficult at some point.
Looking forward, earnings per share is forecast to rise by 12.2% over the next year. If the dividend continues on this path, the payout ratio could be 48% by next year, which we think can be pretty sustainable going forward.
Royalty Pharma Is Still Building Its Track Record
Without a track record of dividend payments, we can't make a judgement on how stable it has been. This doesn't mean that the company can't pay a good dividend, but just that we want to wait until it can prove itself.
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. However, initial appearances might be deceiving. EPS has fallen over the last year, with this year's number 59% below last year. A large drop like this could indicate a major challenge in the business, and could certainly flow through to reduced dividend payments. However, we would never make any decisions based on only a single year of data, especially when assessing long term dividend potential.
The Dividend Could Prove To Be Unreliable
Overall, we always like to see the dividend being raised, but we don't think Royalty Pharma will make a great income stock. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. We would be a touch cautious of relying on this stock primarily for the dividend income.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 4 warning signs for Royalty Pharma that investors need to be conscious of moving forward. Looking for more high-yielding dividend ideas? Try our curated list 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
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.