Royalty Pharma (NASDAQ:RPRX) Will Pay A Dividend Of $0.21

The board of Royalty Pharma plc (NASDAQ:RPRX) has announced that it will pay a dividend of $0.21 per share on the 14th of June. This means the annual payment is 3.0% of the current stock price, which is above the average for the industry.

See our latest analysis for Royalty Pharma

Royalty Pharma's Payment Has Solid Earnings Coverage

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. However, prior to this announcement, Royalty Pharma's dividend was comfortably covered by both cash flow and earnings. This means that most of its earnings are being retained to grow the business.

Over the next year, EPS is forecast to expand by 17.1%. If the dividend continues along recent trends, we estimate the payout ratio will be 37%, which is in the range that makes us comfortable with the sustainability of the dividend.

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Royalty Pharma Is Still Building Its Track Record

The dividend hasn't seen any major cuts in the past, but the company has only been paying a dividend for 4 years, which isn't that long in the grand scheme of things. The annual payment during the last 4 years was $0.60 in 2020, and the most recent fiscal year payment was $0.84. This works out to be a compound annual growth rate (CAGR) of approximately 8.8% a year over that time. Investors will likely want to see a longer track record of growth before making decision to add this to their income portfolio.

Dividend Growth Potential Is Shaky

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. However, initial appearances might be deceiving. Royalty Pharma's earnings per share has shrunk at 42% a year over the past five years. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough. 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 Royalty Pharma's Dividend

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would be a touch cautious of relying on this stock primarily for the dividend income.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 3 warning signs for Royalty Pharma that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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