Here's Why We're Wary Of Buying Baxter International's (NYSE:BAX) For Its Upcoming Dividend

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It looks like Baxter International Inc. (NYSE:BAX) is about to go ex-dividend in the next 3 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Meaning, you will need to purchase Baxter International's shares before the 30th of November to receive the dividend, which will be paid on the 2nd of January.

The company's upcoming dividend is US$0.29 a share, following on from the last 12 months, when the company distributed a total of US$1.16 per share to shareholders. Last year's total dividend payments show that Baxter International has a trailing yield of 3.2% on the current share price of $36.02. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Baxter International

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Baxter International paid out a disturbingly high 261% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out more than half (66%) of its free cash flow in the past year, which is within an average range for most companies.

It's good to see that while Baxter International's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

historic-dividend
NYSE:BAX Historic Dividend November 26th 2023

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by Baxter International's 17% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.