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 Eli Lilly and Company (NYSE:LLY) is about to go ex-dividend in just 3 days. If you purchase the stock on or after the 12th of November, you won't be eligible to receive this dividend, when it is paid on the 10th of December.
Eli Lilly's upcoming dividend is US$0.74 a share, following on from the last 12 months, when the company distributed a total of US$2.96 per share to shareholders. Based on the last year's worth of payments, Eli Lilly has a trailing yield of 2.1% on the current stock price of $142.74. If you buy this business for its dividend, you should have an idea of whether Eli Lilly's dividend is reliable and sustainable. So we need to investigate whether Eli Lilly can afford its dividend, and if the dividend could grow.
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 a comfortable 47% of its profit last year. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Dividends consumed 51% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
It's positive to see that Eli Lilly'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?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's encouraging to see Eli Lilly has grown its earnings rapidly, up 22% a year for the past five years.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Eli Lilly has lifted its dividend by approximately 4.2% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Eli Lilly is keeping back more of its profits to grow the business.
To Sum It Up
Should investors buy Eli Lilly for the upcoming dividend? From a dividend perspective, we're encouraged to see that earnings per share have been growing, the company is paying out less than half of its earnings, and a bit over half its free cash flow. There's a lot to like about Eli Lilly, and we would prioritise taking a closer look at it.
With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. Every company has risks, and we've spotted 1 warning sign for Eli Lilly you should know about.
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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