Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Merck & Co., Inc. (NYSE:MRK) is about to trade ex-dividend in the next 3 days. You can purchase shares before the 13th of September in order to receive the dividend, which the company will pay on the 7th of October.
Merck’s next dividend payment will be US$0.55 per share, on the back of last year when the company paid a total of US$2.20 to shareholders. Looking at the last 12 months of distributions, Merck has a trailing yield of approximately 2.5% on its current stock price of $86.57. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it’s growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Merck paid out more than half (57%) of its earnings last year, which is a regular payout ratio for most companies. 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. It paid out more than half (70%) of its free cash flow in the past year, which is within an average range for most companies.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Fortunately for readers, Merck’s earnings per share have been growing at 19% a year for the past five years. Merck is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. This is a reasonable combination that could hint at some further dividend increases in the future.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. In the last ten years, Merck has lifted its dividend by approximately 3.8% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Merck is keeping back more of its profits to grow the business.
To Sum It Up
From a dividend perspective, should investors buy or avoid Merck? Higher earnings per share generally lead to higher dividends from dividend-paying stocks over the long run. That’s why we’re glad to see Merck’s earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow – 57% and 70% respectively. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we’re not all that optimistic on its dividend prospects.
Ever wonder what the future holds for Merck? See what the 14 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.