Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Dechra Pharmaceuticals PLC (LON:DPH) is about to go ex-dividend in just 3 days. If you purchase the stock on or after the 24th of October, you won't be eligible to receive this dividend, when it is paid on the 15th of November.
Dechra Pharmaceuticals's next dividend payment will be UK£0.2 per share, and in the last 12 months, the company paid a total of UK£0.3 per share. Last year's total dividend payments show that Dechra Pharmaceuticals has a trailing yield of 1.2% on the current share price of £26.26. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are 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. Last year, Dechra Pharmaceuticals paid out 105% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It distributed 48% of its free cash flow as dividends, a comfortable payout level for most companies.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Dechra Pharmaceuticals fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.
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. If earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see Dechra Pharmaceuticals earnings per share are up 6.3% per annum over the last five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Dechra Pharmaceuticals has delivered 13% dividend growth per year on average over the past ten years. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
The Bottom Line
Is Dechra Pharmaceuticals worth buying for its dividend? Dechra Pharmaceuticals has been steadily growing its earnings per share, and it is paying out just 48% of its cash flow but an uncomfortably high 105% of its income. In summary, it's hard to get excited about Dechra Pharmaceuticals from a dividend perspective.
Curious what other investors think of Dechra Pharmaceuticals? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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