The board of Gilead Sciences, Inc. (NASDAQ:GILD) has announced that it will be paying its dividend of $0.79 on the 28th of March, an increased payment from last year's comparable dividend. This takes the annual payment to 2.8% of the current stock price, which is about average for the industry.

See our latest analysis for Gilead Sciences

Gilead Sciences' Future Dividend Projections Appear Well Covered By Earnings

We aren't too impressed by dividend yields unless they can be sustained over time. Prior to this announcement, the company was paying out 800% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 38%. Generally, we think cash is more important than accounting measures of profit, so with the cash flows easily covering the dividend, we don't think there is much reason to worry.

Analysts expect a massive rise in earnings per share in the next year. Assuming the dividend continues along recent trends, we estimate that the payout ratio could reach 47%, which is in a comfortable range for us.

Gilead Sciences Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. Since 2015, the dividend has gone from $1.72 total annually to $3.16. This implies that the company grew its distributions at a yearly rate of about 6.3% over that duration. The growth of the dividend has been pretty reliable, so we think this can offer investors some nice additional income in their portfolio.

The Dividend Has Limited Growth Potential

The company's investors will be pleased to have been receiving dividend income for some time. However, things aren't all that rosy. Gilead Sciences' earnings per share has shrunk at 38% a year over the past five years. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Gilead Sciences' payments are rock solid. The company is generating plenty of cash, but we still think the dividend is a bit high for comfort. We would probably look elsewhere for an income investment.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 4 warning signs for Gilead Sciences that you should be aware of before investing. Is Gilead Sciences not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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