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Perrigo Company plc's (NYSE:PRGO) periodic dividend will be increasing on the 25th of March to $0.29, with investors receiving 5.1% more than last year's $0.276. This will take the dividend yield to an attractive 4.4%, providing a nice boost to shareholder returns.
See our latest analysis for Perrigo
Estimates Indicate Perrigo's Dividend Coverage Likely To Improve
If the payments aren't sustainable, a high yield for a few years won't matter that much. Perrigo is unprofitable despite paying a dividend, and it is paying out 96% of its free cash flow. These payout levels would generally be quite difficult to keep up.
According to analysts, EPS should be several times higher next year. Assuming the dividend continues along recent trends, we think the payout ratio will be 59%, which makes us pretty comfortable with the sustainability of the dividend.
Perrigo Has A Solid Track Record
The company has an extended history of paying stable dividends. Since 2015, the dividend has gone from $0.42 total annually to $1.1. This implies that the company grew its distributions at a yearly rate of about 10% over that duration. It is good to see that there has been strong dividend growth, and that there haven't been any cuts for a long time.
Dividend Growth Potential Is Shaky
Investors could be attracted to the stock based on the quality of its payment history. However, initial appearances might be deceiving. Perrigo's EPS has fallen by approximately 47% per year during the past five years. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this becomes a long term trend.
The Dividend Could Prove To Be Unreliable
In summary, while it's always good to see the dividend being raised, we don't think Perrigo's payments are rock solid. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. 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. Just as an example, we've come across 2 warning signs for Perrigo you should be aware of, and 1 of them shouldn't be ignored. Is Perrigo 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.