Gilead Sciences, Inc. (NASDAQ:GILD) will increase its dividend on the 30th of March to US$0.73. This will take the annual payment to 4.6% of the stock price, which is above what most companies in the industry pay.
Gilead Sciences' Dividend Is Well Covered By Earnings
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Gilead Sciences' dividend was comfortably covered by both cash flow and earnings. This means that a large portion of its earnings are being retained to grow the business.
Looking forward, earnings per share is forecast to rise by 1.1% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 64%, which is in the range that makes us comfortable with the sustainability of the dividend.
Gilead Sciences Doesn't Have A Long Payment History
It is great to see that Gilead Sciences has been paying a stable dividend for a number of years now, however we want to be a bit cautious about whether this will remain true through a full economic cycle. The dividend has gone from US$1.72 in 2015 to the most recent annual payment of US$2.92. This works out to be a compound annual growth rate (CAGR) of approximately 7.9% a year over that time. Gilead Sciences has a nice track record of dividend growth but we would wait until we see a longer track record before getting too confident.
The Dividend Has Limited Growth Potential
The company's investors will be pleased to have been receiving dividend income for some time. Unfortunately things aren't as good as they seem. Over the past five years, it looks as though Gilead Sciences' EPS has declined at around 13% a year. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. On the bright side, earnings are predicted to gain some ground over the next year, but until this turns into a pattern we wouldn't be feeling too comfortable.
Our Thoughts On Gilead Sciences' Dividend
Overall, we always like to see the dividend being raised, but we don't think Gilead Sciences will make a great income stock. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. We would probably look elsewhere for an income investment.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 1 warning sign for Gilead Sciences that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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