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. Although the dividend is now higher, the yield is only 0.8%, which is below the industry average.
Check out our latest analysis for Eli Lilly
It would be nice for the yield to be higher, but we should also check if higher levels of dividend payment would be sustainable. Before making this announcement, Eli Lilly was earning enough to cover the dividend, but it wasn’t generating any free cash flows. No cash flows could definitely make returning cash to shareholders difficult, or at least mean the balance sheet will come under pressure.
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 18%, which makes us pretty comfortable with the sustainability of the dividend.
The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. Since 2015, the dividend has gone from $1.96 total annually to $6.00. This means that it has been growing its distributions at 12% per annum over that time. We can see that payments have shown some very nice upward momentum without faltering, which provides some reassurance that future payments will also be reliable.
Some investors will be chomping at the bit to buy some of the company’s stock based on its dividend history. Eli Lilly has impressed us by growing EPS at 16% per year over the past five years. The lack of cash flows does make us a bit cautious though, especially when it comes to the future of the dividend.
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. This company is not in the top tier of income providing stocks.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we’ve identified 2 warning signs for Eli Lilly that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated list of high yield 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.
