The board of Eli Lilly and Company (NYSE:LLY) has announced that it will be paying its dividend of $1.50 on the 10th of March, an increased payment from last year’s comparable dividend. Despite this raise, the dividend yield of 0.8% is only a modest boost to shareholder returns.

Check out our latest analysis for Eli Lilly

Eli Lilly’s Payment Could Potentially Have Solid Earnings Coverage

While yield is important, another factor to consider about a company’s dividend is whether the current payout levels are feasible. Based on the last payment, Eli Lilly’s earnings were much higher than the dividend, but it wasn’t converting those earnings into cash flow. Since a dividend means the company is paying out cash to investors, this could prove to be a problem in the future.

Looking forward, earnings per share is forecast to rise exponentially over the next year. Assuming the dividend continues along recent trends, we think the payout ratio will be 18%, which makes us pretty comfortable with the sustainability of the dividend.

Eli Lilly Has A Solid Track Record

The company has an extended history of paying stable dividends. Since 2014, the annual payment back then was $1.96, compared to the most recent full-year payment of $6.00. This means that it has been growing its distributions at 12% per annum over that time. So, dividends have been growing pretty quickly, and even more impressively, they haven’t experienced any notable falls during this period.

The Dividend Looks Likely To Grow

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Eli Lilly has seen EPS rising for the last five years, at 16% per annum. While on an earnings basis, this company looks appealing as an income stock, the cash payout ratio still makes us cautious.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. We don’t think Eli Lilly is a great stock to add to your portfolio if income is your focus.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. For example, we’ve picked out 2 warning signs for Eli Lilly that investors should know about before committing capital to this stock. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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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.