Novo Nordisk A/S (CPH:NOVO B) stock is about to trade ex-dividend in 3 days time. You will need to purchase shares before the 27th of March to receive the dividend, which will be paid on the 31st of March.
Novo Nordisk's next dividend payment will be ø5.35 per share, on the back of last year when the company paid a total of ø8.35 to shareholders. Calculating the last year's worth of payments shows that Novo Nordisk has a trailing yield of 2.3% on the current share price of DKK359.35. If you buy this business for its dividend, you should have an idea of whether Novo Nordisk's dividend is reliable and sustainable. So we need to investigate whether Novo Nordisk can afford its dividend, and if the dividend could grow.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Novo Nordisk is paying out an acceptable 51% of its profit, a common payout level among most companies. 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. Over the last year it paid out 55% of its free cash flow as dividends, within the usual range for most companies.
It's positive to see that Novo Nordisk'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. For this reason, we're glad to see Novo Nordisk's earnings per share have risen 10% per annum over the last five years. Novo Nordisk has an average payout ratio which suggests a balance between growing earnings and rewarding shareholders. This is a reasonable combination that could hint at some further dividend increases in the future.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Novo Nordisk has delivered 19% dividend growth per year on average over the past ten years. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.
From a dividend perspective, should investors buy or avoid Novo Nordisk? Higher earnings per share generally lead to higher dividends from dividend-paying stocks over the long run. That's why we're glad to see Novo Nordisk's earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow - 51% and 55% respectively. Overall, it's hard to get excited about Novo Nordisk from a dividend perspective.
While it's tempting to invest in Novo Nordisk for the dividends alone, you should always be mindful of the risks involved. In terms of investment risks, we've identified 1 warning sign with Novo Nordisk and understanding them should be part of your investment process.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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.
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