Merck & Co., Inc. (NYSE:MRK) will increase its dividend on the 8th of January to $0.77, which is 5.5% higher than last year’s payment from the same period of $0.73. Based on this payment, the dividend yield for the company will be 2.8%, which is fairly typical for the industry.
View our latest analysis for Merck
Merck’s Payment Has Solid Earnings Coverage
Solid dividend yields are great, but they only really help us if the payment is sustainable. Before making this announcement, Merck’s dividend was higher than its profits, but the free cash flows quite comfortably covered it. Generally, we think cash is more important than accounting measures of profit, so with the cash flows easily covering the dividend, we don’t think there is much reason to worry.
Looking forward, earnings per share is forecast to rise exponentially over the next year. Assuming the dividend continues along recent trends, we estimate that the payout ratio could reach 35%, which is in a comfortable range for us.
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Merck Has A Solid Track Record
The company has a sustained record of paying dividends with very little fluctuation. The annual payment during the last 10 years was $1.72 in 2013, and the most recent fiscal year payment was $2.92. This means that it has been growing its distributions at 5.4% per annum over that time. The dividend has been growing very nicely for a number of years, and has given its shareholders some nice income in their portfolios.
There Isn’t Much Room To Grow The Dividend
The company’s investors will be pleased to have been receiving dividend income for some time. We are encouraged to see that Merck has grown earnings per share at 7.9% per year over the past five years. However, the payout ratio is very high, not leaving much room for growth of the dividend in the future.
Our Thoughts On Merck’s Dividend
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The company has been bring in plenty of cash to cover the dividend, but we don’t necessarily think that makes it a great dividend stock. We would probably look elsewhere for an income investment.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. 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 5 warning signs for Merck that investors need to be conscious of moving forward. Is Merck not quite the opportunity you were looking for? Why not check out our selection of top 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.