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Dividend Investors: Don't Be Too Quick To Buy Eli Lilly and Company (NYSE:LLY) For Its Upcoming Dividend

Simply Wall St

Eli Lilly and Company (NYSE:LLY) is about to trade ex-dividend in the next 3 days. You can purchase shares before the 14th of August in order to receive the dividend, which the company will pay on the 10th of September.

Eli Lilly's upcoming dividend is US$0.65 a share, following on from the last 12 months, when the company distributed a total of US$2.58 per share to shareholders. Based on the last year's worth of payments, Eli Lilly stock has a trailing yield of around 2.3% on the current share price of $113.77. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Eli Lilly

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. Eli Lilly paid out 57% of its earnings to investors last year, a normal payout level for most businesses. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the last year it paid out 72% of its free cash flow as dividends, within the usual range for most companies.

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.

NYSE:LLY Historical Dividend Yield, August 10th 2019

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings fall far enough, the company could be forced to cut its dividend. It's not encouraging to see that Eli Lilly's earnings are effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Eli Lilly has delivered an average of 3.2% per year annual increase in its dividend, based on the past 10 years of dividend payments.

The Bottom Line

Is Eli Lilly an attractive dividend stock, or better left on the shelf? While earnings per share are flat, at least Eli Lilly has not committed itself to an unsustainable dividend, with its earnings and cashflow payout ratios within reasonable bounds. It's not that we think Eli Lilly is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Curious what other investors think of Eli Lilly? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.