Royalty Pharma plc's (NASDAQ:RPRX) dividend will be increasing to US$0.19 on 15th of March. Although the dividend is now higher, the yield is only 1.8%, which is below the industry average.
Royalty Pharma's Dividend Is Well Covered By Earnings
It would be nice for the yield to be higher, but we should also check if higher levels of dividend payment would be sustainable. Royalty Pharma is quite easily earning enough to cover the dividend, however it is being let down by weak cash flows. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.
Over the next year, EPS is forecast to expand by 6.8%. If the dividend continues on this path, the payout ratio could be 51% by next year, which we think can be pretty sustainable going forward.
Royalty Pharma Doesn't Have A Long Payment History
It's not possible for us to make a backward looking judgement just based on a short payment history. 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.
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. However, things aren't all that rosy. Over the last year, Royalty Pharma's EPS has fallen by 59%. Decreases in earnings as large as this could start to put some pressure on the dividend if they are sustained for several years. 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
In summary, while it's always good to see the dividend being raised, we don't think Royalty Pharma's payments are rock solid. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We would probably look elsewhere for an income investment.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 4 warning signs for Royalty Pharma that investors should know about before committing capital to this stock. We have also put together a list of global stocks with a solid dividend.
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