Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that AstraZeneca PLC (LON:AZN) is about to go ex-dividend in just 3 days. Ex-dividend means that investors that purchase the stock on or after the 27th of February will not receive this dividend, which will be paid on the 30th of March.
AstraZeneca's next dividend payment will be UK£1.46 per share, on the back of last year when the company paid a total of UK£2.80 to shareholders. Based on the last year's worth of payments, AstraZeneca has a trailing yield of 2.8% on the current stock price of £76.9. If you buy this business for its dividend, you should have an idea of whether AstraZeneca's dividend is reliable and sustainable. So we need to investigate whether AstraZeneca 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. Last year, AstraZeneca paid out 273% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. A useful secondary check can be to evaluate whether AstraZeneca generated enough free cash flow to afford its dividend. Over the past year it paid out 139% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.
Cash is slightly more important than profit from a dividend perspective, but given AstraZeneca's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings fall far enough, the company could be forced to cut its dividend. It's not encouraging to see that AstraZeneca's earnings are effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. With slack earnings growth and paying out substantially more than it reported in profit last year, this dividend is potentially at risk of being cut.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. AstraZeneca has delivered 3.0% dividend growth per year on average over the past ten years.
The Bottom Line
Is AstraZeneca an attractive dividend stock, or better left on the shelf? AstraZeneca is paying out an uncomfortably high percentage of both earnings and cash flow as dividends, at the same time as its earnings per share are struggling to grow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
Curious what other investors think of AstraZeneca? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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