The board of Zimmer Biomet Holdings, Inc. (NYSE:ZBH) has announced that it will pay a dividend of US$0.24 per share on the 29th of July. This means the annual payment is 4.6% of the current stock price, which is above the average for the industry.
Zimmer Biomet Holdings Doesn't Earn Enough To Cover Its Payments
If the payments aren't sustainable, a high yield for a few years won't matter that much. The last payment made up 71% of earnings, but cash flows were much higher. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.
The next 12 months is set to see EPS grow by 162.2%. If the dividend continues on its recent course, the payout ratio in 12 months could be 137%, which is a bit high and could start applying pressure to the balance sheet.
Zimmer Biomet Holdings Has A Solid Track Record
The company has an extended history of paying stable dividends. The dividend has gone from US$0.72 in 2012 to the most recent annual payment of US$0.96. This means that it has been growing its distributions at 2.9% per annum over that time. Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.
The Dividend Has Limited Growth Potential
Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Let's not jump to conclusions as things might not be as good as they appear on the surface. Over the past five years, it looks as though Zimmer Biomet Holdings' EPS has declined at around 12% a year. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this becomes a long term trend.
Our Thoughts On Zimmer Biomet Holdings' Dividend
Overall, a consistent dividend is a good thing, and we think that Zimmer Biomet Holdings has the ability to continue this into the future. The earnings coverage is acceptable for now, but with earnings on the decline we would definitely keep an eye on the payout ratio. The payment isn't stellar, but it could make a decent addition to a dividend portfolio.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 4 warning signs for Zimmer Biomet Holdings that investors need to be conscious of moving forward. Is Zimmer Biomet Holdings not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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