Royalty Pharma plc (NASDAQ:RPRX) will increase its dividend on the 15th of March to US$0.19. This takes the annual payment to 1.7% of the current stock price, which unfortunately is below what the industry is paying.
Royalty Pharma's Dividend Is Well Covered By Earnings
Even a low dividend yield can be attractive if it is sustained for years on end. Royalty Pharma is quite easily earning enough to cover the dividend, however it is being let down by weak cash flows. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.
Looking forward, earnings per share is forecast to rise by 12.2% over the next year. If the dividend continues on this path, the payout ratio could be 48% by next year, which we think can be pretty sustainable going forward.
Royalty Pharma Is Still Building Its Track Record
Without a track record of dividend payments, we can't make a judgement on how stable it has been. This doesn't mean that the company can't pay a good dividend, but just that we want to wait until it can prove itself.
Dividend Growth Potential Is Shaky
The company's investors will be pleased to have been receiving dividend income for some time. However, initial appearances might be deceiving. Royalty Pharma has seen EPS fall by 59% over the last 12 months. A large drop like this could indicate a major challenge in the business, and could certainly flow through to reduced dividend payments. We do note though, one year is too short a time to be drawing strong conclusions about a company's future prospects.
Royalty Pharma's Dividend Doesn't Look Sustainable
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While Royalty Pharma is earning enough to cover the payments, the cash flows are lacking. We would be a touch cautious of relying on this stock primarily for the dividend income.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've picked out 4 warning signs for Royalty Pharma that investors should know about before committing capital to this stock. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.
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