When people think of “safe” dividends, they tend to envision those with single-digit yields.
As we’ve learned here in Safety Net, however, yield isn’t what determines dividend safety. A company’s free cash flow, payout ratio and dividend track record are much more important.
So today we’re looking at a company that has a low yield… but is it hitting the right marks when it comes to our grading system?
Introducing Baxter International Inc. (NYSE: BAX)…
Baxter is a multinational healthcare company focused on treating kidney disease and other acute medical conditions. Founded in 1931, it was the first company to introduce the functioning artificial kidney. And today, the company offers a variety of products, including dialysis therapies, inhaled anesthetics and smart bed systems.
With that in mind, investors want to know whether Baxter’s 2.75% dividend yield is safe.
Baxter’s free cash flow has been all over the place in the last few years.
Free cash flow dropped from $1.5 billion in 2021 to $532 million in 2022.
The reason? Baxter was dealing with a difficult acquisition.
In 2021, Baxter acquired Hill-Rom, a hospital bed maker. And Hill-Rom’s poor performance since made for a poor 2022 for Baxter as a whole.
Cash flow is rebounding this year and is expected to hit $1.4 billion. But it could be too little, too late… The stain from last year marks the company with uncertainty.
Baxter paid out $573 million in dividends last year. And it is expected to pay out $587.4 million in dividends this year.
The lack of free cash flow meant that 2022’s payout ratio was over 100% at 107.7%. This means the company was paying out more in dividends than its cash flow could support.
Fortunately for Baxter, the payout ratio is expected to fall to 41.96% in 2023.
Finally, Baxter has a history of cutting its dividend, which is a big no-no for Safety Net. In 2015, not long after the company completed a spinoff, it decided that the dividend wasn’t a priority. And we know that when a company cuts its dividend once, it’s likely to do it again someday.
Cash flow issues and a history of dividend cuts make me believe there’s a strong likelihood that Baxter will cut its dividend in the future.
It goes to show that even companies with smaller dividend yields can be unsafe.
Dividend Safety Rating: F
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