Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Eli Lilly and Company (NYSE:LLY) is about to trade ex-dividend in the next 4 days. Investors can purchase shares before the 13th of August in order to be eligible for this dividend, which will be paid on the 10th of September.
Eli Lilly's next dividend payment will be US$0.74 per share, on the back of last year when the company paid a total of US$2.96 to shareholders. Calculating the last year's worth of payments shows that Eli Lilly has a trailing yield of 1.9% on the current share price of $152.93. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
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. Fortunately Eli Lilly's payout ratio is modest, at just 45% of profit. 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 positive to see that Eli Lilly'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. It's encouraging to see Eli Lilly has grown its earnings rapidly, up 23% a year for the past five years.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, Eli Lilly has lifted its dividend by approximately 4.2% a year on average. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.
The Bottom Line
Has Eli Lilly got what it takes to maintain its dividend payments? From a dividend perspective, we're encouraged to see that earnings per share have been growing, the company is paying out less than half of its earnings, and a bit over half its free cash flow. Eli Lilly looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
While it's tempting to invest in Eli Lilly for the dividends alone, you should always be mindful of the risks involved. For example - Eli Lilly has 1 warning sign we think 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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