Royalty Pharma's (NASDAQ:RPRX) Upcoming Dividend Will Be Larger Than Last Year's
Royalty Pharma plc (NASDAQ:RPRX) has announced that it will be increasing its dividend from last year's comparable payment on the 15th of June to $0.20. Based on this payment, the dividend yield for the company will be 2.4%, which is fairly typical for the industry.
Check out our latest analysis for Royalty Pharma
Royalty Pharma's Earnings Easily Cover The Distributions
We aren't too impressed by dividend yields unless they can be sustained over time. At the time of the last dividend payment, Royalty Pharma was paying out a very large proportion of what it was earning and 130% of cash flows. Paying out such a high proportion of cash flows certainly exposes the company to cutting the dividend if cash flows were to reduce.
Analysts expect a massive rise in earnings per share in the next year. Assuming the dividend continues along recent trends, we estimate that the payout ratio could reach 10%, which is in a comfortable range for us.
Royalty Pharma Doesn't Have A Long Payment History
The dividend hasn't seen any major cuts in the past, but the company has only been paying a dividend for 3 years, which isn't that long in the grand scheme of things. Since 2020, the annual payment back then was $0.60, compared to the most recent full-year payment of $0.80. This works out to be a compound annual growth rate (CAGR) of approximately 10% a year over that time. Royalty Pharma has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.
Dividend Growth Potential Is Shaky
Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Let's not jump to conclusions as things might not be as good as they appear on the surface. Royalty Pharma's EPS has fallen by approximately 50% per year during the past three years. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. Over the next year, however, earnings are actually predicted to rise, but we would still be cautious until a track record of earnings growth can be built.
The Dividend Could Prove To Be Unreliable
Overall, we always like to see the dividend being raised, but we don't think Royalty Pharma will make a great income stock. The track record isn't great, and the payments are a bit high to be considered sustainable. We would probably look elsewhere for an income investment.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 5 warning signs for Royalty Pharma that investors should take into consideration. Is Royalty Pharma not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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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.
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