Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Abbott Laboratories (NYSE:ABT) is about to trade ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 11th of October will not receive this dividend, which will be paid on the 15th of November.
Abbott Laboratories's next dividend payment will be US$0.3 per share, and in the last 12 months, the company paid a total of US$1.3 per share. Based on the last year's worth of payments, Abbott Laboratories stock has a trailing yield of around 1.6% on the current share price of $81.99. 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 Abbott Laboratories can afford its dividend, and if the dividend could grow.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Its dividend payout ratio is 76% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth It could become a concern if earnings started to decline. 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 52% of its free cash flow as dividends, within the usual range for most companies.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
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. With that in mind, we're encouraged by the steady growth at Abbott Laboratories, with earnings per share up 5.2% on average over the last five years. While earnings have been growing at a credible rate, the company is paying out a majority of its earnings to shareholders. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Abbott Laboratories's dividend payments per share have declined at 1.2% per year on average over the past ten years, which is uninspiring.
Has Abbott Laboratories got what it takes to maintain its dividend payments? Earnings per share growth has been unremarkable, and while the company is paying out a majority of its earnings and cash flow in the form of dividends, the dividend payments don't appear excessive. To summarise, Abbott Laboratories looks okay on this analysis, although it doesn't appear a stand-out opportunity.
Ever wonder what the future holds for Abbott Laboratories? See what the 20 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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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. Thank you for reading.