Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Hikma Pharmaceuticals PLC (LON:HIK) is about to go ex-dividend in just 2 days. Ex-dividend means that investors that purchase the stock on or after the 22nd of August will not receive this dividend, which will be paid on the 23rd of September.
Hikma Pharmaceuticals's upcoming dividend is US$0.14 a share, following on from the last 12 months, when the company distributed a total of US$0.38 per share to shareholders. Looking at the last 12 months of distributions, Hikma Pharmaceuticals has a trailing yield of approximately 1.6% on its current stock price of £20.01. 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.
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 Hikma Pharmaceuticals's payout ratio is modest, at just 27% of profit. A useful secondary check can be to evaluate whether Hikma Pharmaceuticals generated enough free cash flow to afford its dividend. Fortunately, it paid out only 33% of its free cash flow in the past year.
It's positive to see that Hikma Pharmaceuticals'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?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Hikma Pharmaceuticals earnings per share are up 6.8% per annum over the last five years. Management have been reinvested more than half of the company's earnings within the business, and the company has been able to grow earnings with this retained capital. We think this is generally an attractive combination, as dividends can grow through a combination of earnings growth and or a higher payout ratio over time.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Hikma Pharmaceuticals has lifted its dividend by approximately 18% a year on average. 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.
The Bottom Line
Is Hikma Pharmaceuticals an attractive dividend stock, or better left on the shelf? Earnings per share have been growing moderately, and Hikma Pharmaceuticals is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. It might be nice to see earnings growing faster, but Hikma Pharmaceuticals is being conservative with its dividend payouts and could still perform reasonably over the long run. There's a lot to like about Hikma Pharmaceuticals, and we would prioritise taking a closer look at it.
Ever wonder what the future holds for Hikma Pharmaceuticals? See what the ten 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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If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.