It Might Not Be A Great Idea To Buy AbbVie Inc. (NYSE:ABBV) For Its Next Dividend

It looks like AbbVie Inc. (NYSE:ABBV) is about to go ex-dividend in the next two days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. This means that investors who purchase AbbVie's shares on or after the 15th of July will not receive the dividend, which will be paid on the 15th of August.

The company's upcoming dividend is US$1.55 a share, following on from the last 12 months, when the company distributed a total of US$6.20 per share to shareholders. Calculating the last year's worth of payments shows that AbbVie has a trailing yield of 3.6% on the current share price of US$169.91. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! As a result, readers should always check whether AbbVie has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for AbbVie

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. AbbVie paid out 180% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Fortunately, it paid out only 49% of its free cash flow in the past year.

It's good to see that while AbbVie's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That explains why we're not overly excited about AbbVie's flat earnings over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. AbbVie has delivered an average of 15% per year annual increase in its dividend, based on the past 10 years of dividend payments.

To Sum It Up

Is AbbVie an attractive dividend stock, or better left on the shelf? Along with flat earnings per share, AbbVie paid out an uncomfortably high percentage of its earnings. It paid out a lower percentage of its free cash flow. It's not that we think AbbVie is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in AbbVie despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Our analysis shows 3 warning signs for AbbVie and you should be aware of them before buying any shares.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com