Teva Pharmaceutical's Dividend X-Ray

Dan Dzombak, The Motley Fool
Updated

Not all dividends are created equal. Here, we'll do a top-to-bottom analysis of a company to understand the quality of its dividend and see how that's changed over the past five years.

The company we're looking at today is Teva Pharmaceuticals (NAS: TEVA) , which yields 1.5%.

Dividend
To evaluate the quality of a dividend, the first thing to consider is whether the company has paid a dividend consistently over the past five years and, if so, how much has it grown.

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Teva Pharmaceutical Industries Dividend Chart by YCharts

Teva Pharmaceuticals has slowly been raising its dividend the past five years. Most recently, the company paid out $0.22.

Sustainability
The main tools we use to evaluate the safety of a dividend are:

  • The EPS payout ratio, or dividends per share divided by earnings per share. The EPS payout ratio measures the percentage of earnings that go toward paying the dividend. A ratio greater than 80% is worrisome.

  • The FCF payout ratio, or dividends per share divided by free cash flow per share. Earnings alone don't always paint a complete picture of a business' health. The FCF payout ratio measures the percentage of free cash flow devoted to paying the dividend. Again, a ratio greater than 80% could be a red flag.

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Source: S&P Capital IQ.

While Teva's free cash flow payout ratio fluctuated some in 2008 and 2009, since that time both payout ratios have come to rest near 30%, a very low level.

Another tool for better investing
Most investors don't keep tabs on their companies. That's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. We can help you keep tabs on your companies with My Watchlist, our free, personalized stock-tracking service.

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