Don't Race Out To Buy Gilead Sciences, Inc. (NASDAQ:GILD) Just Because It's Going Ex-Dividend

It looks like Gilead Sciences, Inc. (NASDAQ:GILD) is about to go ex-dividend in the next four days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. Therefore, if you purchase Gilead Sciences' shares on or after the 14th of December, you won't be eligible to receive the dividend, when it is paid on the 29th of December.

The company's next dividend payment will be US$0.73 per share, and in the last 12 months, the company paid a total of US$2.92 per share. Calculating the last year's worth of payments shows that Gilead Sciences has a trailing yield of 3.3% on the current share price of $89.47. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Gilead Sciences can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Gilead Sciences

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. Gilead Sciences paid out 109% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Thankfully its dividend payments took up just 41% of the free cash flow it generated, which is a comfortable payout ratio.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Gilead Sciences fortunately did generate enough cash to fund its dividend. 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.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Gilead Sciences's earnings per share have fallen at approximately 23% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last eight years, Gilead Sciences has lifted its dividend by approximately 6.8% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Gilead Sciences is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

Final Takeaway

Is Gilead Sciences an attractive dividend stock, or better left on the shelf? It's never great to see earnings per share declining, especially when a company is paying out 109% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Gilead Sciences's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

So if you're still interested in Gilead Sciences despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. To help with this, we've discovered 4 warning signs for Gilead Sciences that you should be aware of before investing in their shares.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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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.

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