Eli Lilly and Company's (NYSE:LLY) dividend will be increasing to US$0.98 on 10th of March. This takes the annual payment to 1.4% of the current stock price, which unfortunately is below what the industry is paying.
Eli Lilly's Dividend Is Well Covered By Earnings
The dividend yield is a little bit low, but sustainability of the payments is also an important part of evaluating an income stock. Prior to this announcement, Eli Lilly was quite comfortably covering its dividend with earnings and it was paying more than 75% of its free cash flow to shareholders. The business is earning enough to make the dividend feasible, but the cash payout ratio of 77% indicates it is more focused on returning cash to shareholders than growing the business.
The next year is set to see EPS grow by 16.1%. Assuming the dividend continues along recent trends, we think the payout ratio could be 50% by next year, which is in a pretty sustainable range.
Eli Lilly Has A Solid Track Record
The company has an extended history of paying stable dividends. Since 2012, the first annual payment was US$1.96, compared to the most recent full-year payment of US$3.92. This implies that the company grew its distributions at a yearly rate of about 7.2% over that duration. Companies like this can be very valuable over the long term, if the decent rate of growth can be maintained.
The Dividend Looks Likely To Grow
The company's investors will be pleased to have been receiving dividend income for some time. Eli Lilly has impressed us by growing EPS at 23% per year over the past five years. The company's earnings per share has grown rapidly in recent years, and it has a good balance between reinvesting and paying dividends to shareholders, so we think that Eli Lilly could prove to be a strong dividend payer.
In Summary
In summary, it's great to see that the company can raise the dividend and keep it in a sustainable range. However, lack of cash flows makes us wary of the potential for cuts in the dividend's future, even though the dividend is generally looking okay. The dividend looks okay, but there have been some issues in the past, so we would be a little bit cautious.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've picked out 1 warning sign for Eli Lilly 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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