- Oops!Something went wrong.Please try again later.
Merck & Co., Inc. (NYSE:MRK) has announced that it will be increasing its dividend on the 7th of January to US$0.69. This will take the annual payment from 3.8% to 8.4% of the stock price, which is above what most companies in the industry pay.
Merck Is Paying Out More Than It Is Earning
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before making this announcement, Merck's was paying out quite a large proportion of earnings and 85% of free cash flows. This is usually an indication that the focus of the company is returning cash to shareholders rather than reinvesting it for growth.
Earnings per share is forecast to rise by 81.2% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could reach 108%, which probably can't continue putting some pressure on the balance sheet.
Merck Has A Solid Track Record
Even over a long history of paying dividends, the company's distributions have been remarkably stable. Since 2011, the dividend has gone from US$1.52 to US$2.76. This works out to be a compound annual growth rate (CAGR) of approximately 6.1% a year over that time. The dividend has been growing very nicely for a number of years, and has given its shareholders some nice income in their portfolios.
Merck's Dividend Might Lack Growth
The company's investors will be pleased to have been receiving dividend income for some time. It's encouraging to see Merck has been growing its earnings per share at 11% a year over the past five years. Past earnings growth has been decent, but unless this is one of those rare businesses that can grow without additional capital investment or marketing spend, we'd generally expect the higher payout ratio to limit its future growth prospects.
Overall, we always like to see the dividend being raised, but we don't think Merck will make a great income stock. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. We would be a touch cautious of relying on this stock primarily for the dividend income.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 2 warning signs for Merck that you should be aware of before investing. We have also put together a list of global stocks with a solid dividend.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.