Royalty Pharma's (NASDAQ:RPRX) Dividend Will Be Increased To $0.20

Royalty Pharma plc's (NASDAQ:RPRX) periodic dividend will be increasing on the 15th of March to $0.20, with investors receiving 5.3% more than last year's $0.19. Despite this raise, the dividend yield of 1.9% is only a modest boost to shareholder returns.

See our latest analysis for Royalty Pharma

Royalty Pharma's Payment Has Solid Earnings Coverage

While yield is important, another factor to consider about a company's dividend is whether the current payout levels are feasible. Based on the last dividend, Royalty Pharma is earning enough to cover the payment, but then it makes up 115% of cash flows. The company might be more focused on returning cash to shareholders, but paying out this much of its cash flow could expose the dividend to being cut in the future.

According to analysts, EPS should be several times higher next year. Assuming the dividend continues along recent trends, we think the payout ratio will be 21%, which makes us pretty 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 2 years, which isn't that long in the grand scheme of things. Since 2021, the annual payment back then was $0.60, compared to the most recent full-year payment of $0.76. This works out to be a compound annual growth rate (CAGR) of approximately 13% a year over that time. We're not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.

The Dividend Has Limited Growth Potential

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Let's not jump to conclusions as things might not be as good as they appear on the surface. Over the last year, Royalty Pharma's EPS has fallen by 40%. Such a large drop can indicate that the business has run into some trouble and might end up in the dividend having to be reduced. Any one year of performance can be misleading for a variety of reasons, so we wouldn't like to form any strong conclusions based on these numbers alone.

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. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. This company is not in the top tier of income providing stocks.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. 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 collection of strong dividend payers.

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