ResMed Inc. (NYSE:RMD) is about to trade ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 6th of November will not receive this dividend, which will be paid on the 12th of December.
ResMed's next dividend payment will be US$0.4 per share, on the back of last year when the company paid a total of US$1.6 to shareholders. Calculating the last year's worth of payments shows that ResMed has a trailing yield of 1.1% on the current share price of $147.92. 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 ResMed has been able to grow its dividends, or if the dividend might be cut.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. ResMed paid out 52% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether ResMed generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 44% of the free cash flow it generated, which is a comfortable payout ratio.
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?
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. This is why it's a relief to see ResMed earnings per share are up 3.7% per annum over the last five years. Earnings growth has been slim and the company is paying out more than half of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. ResMed has delivered 13% dividend growth per year on average over the past seven 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.
To Sum It Up
Has ResMed got what it takes to maintain its dividend payments? Earnings per share growth has been modest and ResMed paid out over half of its profits and less than half of its free cash flow, although both payout ratios are within normal limits. Overall, it's hard to get excited about ResMed from a dividend perspective.
Ever wonder what the future holds for ResMed? See what the 13 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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