AbbVie Inc. (NYSE:ABBV) stock is about to trade ex-dividend in four 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.
AbbVie's next dividend payment will be US$1.30 per share. Last year, in total, the company distributed US$4.72 to shareholders. Last year's total dividend payments show that AbbVie has a trailing yield of 4.8% on the current share price of $107.27. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether AbbVie has been able to grow its dividends, or if the dividend might be cut.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. AbbVie paid out 103% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. A useful secondary check can be to evaluate whether AbbVie generated enough free cash flow to afford its dividend. Fortunately, it paid out only 47% of its free cash flow in the past year.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and AbbVie fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.
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. It's encouraging to see AbbVie has grown its earnings rapidly, up 33% a year for the past five years.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past eight years, AbbVie has increased its dividend at approximately 16% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
From a dividend perspective, should investors buy or avoid AbbVie? Earnings per share have been rising nicely although, even though its cashflow payout ratio is low, we question why AbbVie is paying out so much of its profit. To summarise, AbbVie looks okay on this analysis, although it doesn't appear a stand-out opportunity.
While it's tempting to invest in AbbVie for the dividends alone, you should always be mindful of the risks involved. Our analysis shows 4 warning signs for AbbVie that we strongly recommend you have a look at before investing in the company.
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.
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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