Eli Lilly and Company (NYSE:LLY) is about to trade ex-dividend in the next three days. This means that investors who purchase shares on or after the 12th of November will not receive the dividend, which will be paid on the 10th of December.
Eli Lilly's upcoming dividend is US$0.74 a share, following on from the last 12 months, when the company distributed a total of US$2.96 per share to shareholders. Based on the last year's worth of payments, Eli Lilly has a trailing yield of 2.1% on the current stock price of $142.74. 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.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Eli Lilly paid out a comfortable 47% of its profit last year. 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. Over the last year it paid out 51% of its free cash flow as dividends, within the usual 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.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's comforting to see Eli Lilly's earnings have been skyrocketing, up 22% per annum for the past five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Eli Lilly has increased its dividend at approximately 4.2% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Eli Lilly is keeping back more of its profits to grow the business.
Final Takeaway
From a dividend perspective, should investors buy or avoid Eli Lilly? Earnings per share have grown at a nice rate in recent times and over the last year, Eli Lilly paid out less than half its earnings and a bit over half its free cash flow. Eli Lilly looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
While it's tempting to invest in Eli Lilly for the dividends alone, you should always be mindful of the risks involved. Case in point: We've spotted 1 warning sign for Eli Lilly you should be aware of.
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.
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. 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.
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