Stock Analysis

Royalty Pharma's (NASDAQ:RPRX) Upcoming Dividend Will Be Larger Than Last Year's

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Royalty Pharma plc's (NASDAQ:RPRX) dividend will be increasing from last year's payment of the same period to $0.20 on 15th of June. This takes the annual payment to 2.3% of the current stock price, which is about average for the industry.

See our latest analysis for Royalty Pharma

Royalty Pharma's Earnings Easily Cover The Distributions

Solid dividend yields are great, but they only really help us if the payment is sustainable. At the time of the last dividend payment, Royalty Pharma was paying out a very large proportion of what it was earning and 130% of cash flows. This is certainly a risk factor, as reduced cash flows could force the company to pay a lower dividend.

Analysts expect a massive rise in earnings per share in the next year. If recent patterns in the dividend continue, we could see the payout ratio reaching 10% which is fairly sustainable.

NasdaqGS:RPRX Historic Dividend May 11th 2023

Royalty Pharma Doesn't Have A Long Payment History

The company has maintained a consistent dividend for a few years now, but we would like to see a longer track record before relying on it. Since 2020, the dividend has gone from $0.60 total annually to $0.80. This means that it has been growing its distributions at 10% per annum over that time. Royalty Pharma has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.

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 earnings per share has shrunk at 50% a year over the past three years. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in 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.

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. The payments are bit high to be considered sustainable, and the track record isn't the best. Overall, we don't think this company has the makings of a good income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 5 warning signs for Royalty Pharma that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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