Income Investors Should Know That Royalty Pharma plc (NASDAQ:RPRX) Goes Ex-Dividend Soon

Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Royalty Pharma plc (NASDAQ:RPRX) is about to go ex-dividend in just three days. Typically, the ex-dividend date is one business day before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Therefore, if you purchase Royalty Pharma’s shares on or after the 15th of May, you won’t be eligible to receive the dividend, when it is paid on the 10th of June.

The company’s upcoming dividend is US$0.235 a share, following on from the last 12 months, when the company distributed a total of US$0.94 per share to shareholders. Calculating the last year’s worth of payments shows that Royalty Pharma has a trailing yield of 1.9% on the current share price of US$50.79. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.

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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. Royalty Pharma paid out a comfortable 47% of its profit last year. A useful secondary check can be to evaluate whether Royalty Pharma generated enough free cash flow to afford its dividend. It paid out 84% of its free cash flow as dividends, which is within usual limits but will limit the company’s ability to lift the dividend if there’s no growth.

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.

View our latest analysis for Royalty Pharma

Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it’s a relief to see Royalty Pharma earnings per share are up 7.2% per annum over the last five years. While earnings have been growing at a credible rate, the company is paying out a majority of its earnings to shareholders. If management lifts the payout ratio further, we’d take this as a tacit signal that the company’s growth prospects are slowing.

The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, six years ago, Royalty Pharma has lifted its dividend by approximately 7.8% a year on average. We’re glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

Final Takeaway

Has Royalty Pharma got what it takes to maintain its dividend payments? Earnings per share have been growing at a steady rate, and Royalty Pharma paid out less than half its profits and more than half its free cash flow as dividends over the last year. Overall we’re not hugely bearish on the stock, but there are likely better dividend investments out there.

In light of that, while Royalty Pharma has an appealing dividend, it’s worth knowing the risks involved with this stock. In terms of investment risks, we’ve identified 3 warning signs with Royalty Pharma and understanding them should be part of your investment process.

Generally, we wouldn’t recommend just buying the first dividend stock you see. Here’s a curated list of interesting stocks that are strong dividend payers.

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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.