Abbott Laboratories (NYSE:ABT) stock is about to trade ex-dividend in 4 days. This means that investors who purchase shares on or after the 14th of January will not receive the dividend, which will be paid on the 16th of February.
Abbott Laboratories's next dividend payment will be US$0.45 per share. Last year, in total, the company distributed US$1.44 to shareholders. Based on the last year's worth of payments, Abbott Laboratories has a trailing yield of 1.3% on the current stock price of $111.61. 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! We need to see whether the dividend is covered by earnings and if it's growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. It paid out 76% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be worried about the risk of a drop in earnings. A useful secondary check can be to evaluate whether Abbott Laboratories generated enough free cash flow to afford its dividend. Over the last year it paid out 54% of its free cash flow as dividends, within the usual range for most companies.
It's positive to see that Abbott Laboratories's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
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. Fortunately for readers, Abbott Laboratories's earnings per share have been growing at 11% a year for the past five years. The company paid out most of its earnings as dividends over the last year, even though business is booming and earnings per share are growing rapidly. Higher earnings generally bode well for growing dividends, although with seemingly strong growth prospects we'd wonder why management are not reinvesting more in the business.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Abbott Laboratories has seen its dividend decline 2.0% per annum on average over the past 10 years, which is not great to see.
To Sum It Up
From a dividend perspective, should investors buy or avoid Abbott Laboratories? It's good to see earnings are growing, since all of the best dividend stocks grow their earnings meaningfully over the long run. That's why we're glad to see Abbott Laboratories's earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow - 76% and 54% 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.
On that note, you'll want to research what risks Abbott Laboratories is facing. For example - Abbott Laboratories has 1 warning sign we think 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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