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Readers hoping to buy Baxter International Inc. (NYSE:BAX) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You can purchase shares before the 3rd of December in order to receive the dividend, which the company will pay on the 4th of January.
Baxter International's next dividend payment will be US$0.24 per share. Last year, in total, the company distributed US$0.98 to shareholders. Calculating the last year's worth of payments shows that Baxter International has a trailing yield of 1.3% on the current share price of $76.02. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Baxter International can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Baxter International paid out more than half (52%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether Baxter International generated enough free cash flow to afford its dividend. It distributed 37% of its free cash flow as dividends, a comfortable payout level for most companies.
It's positive to see that Baxter International'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?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. For this reason, we're glad to see Baxter International's earnings per share have risen 16% per annum over the last five years. Baxter International is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. This is a reasonable combination that could hint at some further dividend increases in the future.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Baxter International's dividend payments per share have declined at 1.7% per year on average over the past 10 years, which is uninspiring.
The Bottom Line
Is Baxter International an attractive dividend stock, or better left on the shelf? Baxter International's growing earnings per share and conservative payout ratios make for a decent combination. We also like that it paid out a lower percentage of its cash flow. Baxter International looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
On that note, you'll want to research what risks Baxter International is facing. Case in point: We've spotted 3 warning signs for Baxter International you should be aware of.
If you're in the market for dividend stocks, we recommend checking our list of top 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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