Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Amgen Inc. (NASDAQ:AMGN) is about to trade ex-dividend in the next 4 days. Investors can purchase shares before the 13th of November in order to be eligible for this dividend, which will be paid on the 8th of December.
Amgen’s next dividend payment will be US$1.60 per share, on the back of last year when the company paid a total of US$6.40 to shareholders. Last year’s total dividend payments show that Amgen has a trailing yield of 2.8% on the current share price of $231.67. If you buy this business for its dividend, you should have an idea of whether Amgen’s dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it’s growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Amgen paid out more than half (50%) of its earnings last year, which is a regular payout ratio for most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It distributed 36% of its free cash flow as dividends, a comfortable payout level for most companies.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
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. Fortunately for readers, Amgen’s earnings per share have been growing at 13% a year for the past five years. Amgen is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. This is a reasonable combination that could hint at some further dividend increases in the future.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. In the last nine years, Amgen has lifted its dividend by approximately 21% a year on average. It’s great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
The Bottom Line
Should investors buy Amgen for the upcoming dividend? We like Amgen’s growing earnings per share and the fact that – while its payout ratio is around average – it paid out a lower percentage of its cash flow. Amgen looks solid on this analysis overall, and we’d definitely consider investigating it more closely.
While it’s tempting to invest in Amgen for the dividends alone, you should always be mindful of the risks involved. To help with this, we’ve discovered 2 warning signs for Amgen that you should be aware of before investing in their shares.
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.