Royalty Pharma just announced a 5% dividend increase, its fourth raise in a row. It has boosted the dividend every year since it began paying one in 2020. The new $0.21 per share quarterly dividend gives the stock a 3% yield. Can investors continue to rely on the dividend the way my buddy relies on those Swedish royalty checks? In 2023, Royalty Pharma is forecast to have generated $2.6 billion in free cash flow, up from $2.1 billion in 2022. The company reports full-year earnings on February 15. This year, however, free cash flow is projected to drop to $2.2 billion, which is not what Safety Net wants to see. The model penalizes companies for decreases in free cash flow. That being said, Royalty Pharma's payout ratio is quite low. The company is expected to have paid out just 15% of its free cash flow in dividends in 2023, and that figure should increase only slightly to 18% this year. I like to see payout ratios of 75% or lower, so Royalty Pharma clearly generates plenty of cash to pay its dividend. As usual, before I reveal my grade, I want to hear from you. Which is more important to you - the low payout ratio or the potential drop in free cash flow? What grade would you give Royalty Pharma's dividend? Click below to leave a comment, then scroll up to finish reading and view my grade. |
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