Dechra Pharmaceuticals PLC (LON:DPH) will increase its dividend on the 19th of November to UK£0.29. Even though the dividend went up, the yield is still quite low at only 0.8%.
View our latest analysis for Dechra Pharmaceuticals
Dechra Pharmaceuticals' Payment Has Solid Earnings Coverage
If it is predictable over a long period, even low dividend yields can be attractive. Prior to this announcement, Dechra Pharmaceuticals' dividend was making up a very large proportion of earnings, and the company was also not generating any cash flow to offset this. This is a pretty unsustainable practice, and could be risky if continued for the long term.
EPS is set to grow by 8.6% over the next year. If the dividend continues growing along recent trends, we estimate the payout ratio could reach 83%, which is on the higher side, but certainly still feasible.
Dechra Pharmaceuticals Has A Solid Track Record
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 2011, the dividend has gone from UK£0.10 to UK£0.41. This implies that the company grew its distributions at a yearly rate of about 14% 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.
Dechra Pharmaceuticals' Dividend Might Lack Growth
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Dechra Pharmaceuticals has impressed us by growing EPS at 29% per year over the past five years. Fast growing earnings are great, but this can rarely be sustained without some reinvestment into the business, which Dechra Pharmaceuticals hasn't been doing.
Overall, we always like to see the dividend being raised, but we don't think Dechra Pharmaceuticals will make a great income stock. Although they have been consistent in the past, we think the payments are a little high to be sustained. We would be a touch cautious of relying on this stock primarily for the dividend income.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 1 warning sign for Dechra Pharmaceuticals 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 performing dividend stock.
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.
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