Baxter International (NYSE:BAX) Could Be A Buy For Its Upcoming Dividend
Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Baxter International Inc. (NYSE:BAX) is about to trade ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 25th of February will not receive the dividend, which will be paid on the 1st of April.
Baxter International's upcoming dividend is US$0.24 a share, following on from the last 12 months, when the company distributed a total of US$0.98 per share to shareholders. Looking at the last 12 months of distributions, Baxter International has a trailing yield of approximately 1.2% on its current stock price of $78.44. 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 Baxter International has been able to grow its dividends, or if the dividend might be cut.
See our latest analysis for Baxter International
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. Fortunately Baxter International's payout ratio is modest, at just 44% of profit. A useful secondary check can be to evaluate whether Baxter International generated enough free cash flow to afford its dividend. Fortunately, it paid out only 41% of its free cash flow in the past year.
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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's comforting to see Baxter International's earnings have been skyrocketing, up 25% per annum for the past five years. Baxter International is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Baxter International has seen its dividend decline 1.7% per annum on average over the past 10 years, which is not great to see.
To Sum It Up
Is Baxter International an attractive dividend stock, or better left on the shelf? It's great that Baxter International is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It's disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. There's a lot to like about Baxter International, and we would prioritise taking a closer look at it.
So while Baxter International looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. In terms of investment risks, we've identified 2 warning signs with Baxter International and understanding them should be part of your investment process.
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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