Last update on 2024-06-27

West Pharmaceutical Services (WST) - Dividend Analysis (Final Score: 6/8)

Analyze the performance and stability of West Pharmaceutical Services (WST) dividend policy with an 8-criteria scoring system. Final Score: 6/8.

Short Analysis - Dividend Score: 6

We're running West Pharmaceutical Services (WST) against the 8-criteria scoring system to evaluate the performance and stability of a company's dividend policy.

The dividend analysis of West Pharmaceutical Services (WST) evaluates its performance and stability using an 8-criteria scoring system, resulting in a dividend score of 6. While WST does demonstrate some strengths, such as a low payout ratio (26.69%) and stable dividend payments over 25 years, it falls short in several areas crucial to income-focused investors. The current dividend yield is significantly lower than the industry average, and the average annual growth rate is below 5%. The company's dividends are increasingly less covered by cash flow, raising concerns about long-term sustainability.

Insights for Value Investors Seeking Stable Income

For investors primarily seeking strong dividend income and growth, WST may not be the best choice due to its lower-than-average yield and declining dividend coverage by cash flow. However, growth-oriented investors might find value in WST due to its strong stock price appreciation and conservative payout ratio. Therefore, if you're more focused on capital appreciation with some level of dividend income, WST might be worth considering. Conversely, those prioritizing high, stable dividend returns might want to explore other options.

For those who are interested in delving deeper into the specifics, the subsequent section provides a comprehensive exploration of the criteria.

Dividend Yield Higher than the Industry Average?

The dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price.

West Pharmaceutical Services (WST) currently has a dividend yield of 0.2187%, which is substantially lower compared to the industry average of 0.67%. This downward trend in its dividend yield can be traced over the last 20 years, where it has declined from 2.3894% in 2003 to its current level. Despite an increasing dividend per share, the stock price has grown exponentially from $8.475 in 2003 to $352.12 in 2023. The increase in stock price is outpacing the growth in dividends, resulting in a lower yield. For income-focused investors, this trend may be concerning as the stock is providing less dividend income compared to its peers. However, for growth-oriented investors, the significant stock price appreciation might offset the low yield.

Average annual Growth Rate higher than 5% in the last 20 years?

Evaluating the historical dividend growth rate is crucial for investors as it indicates the company's commitment to returning value to shareholders and its overall financial health. A higher dividend growth rate often suggests a company is experiencing strong financial performance.

The Dividend Per Share (DPS) ratio for West Pharmaceutical Services (WST) over the past 20 years reveals a fluctuating trend. Starting from 6.5789 in 2003, the ratio saw various ups and downs, peaking at 9.7561 in 2015, and then exhibiting a general downward trajectory to 5.4795 in recent years, with the most recent ratio being 5.4795. The average DPS ratio over the last 20 years is 6.8980. This equates to an average annual growth rate below 5% when considering the 20-year period. The data suggests that the company's dividend growth rate is less than desirable, reflecting potential periods of financial strain or shifts in corporate financial strategy. Therefore, from a dividend growth perspective, this trend may not be favorable for long-term investors relying on consistent and increasing dividend returns.

Average annual Payout Ratio lower than 65% in the last 20 years?

The average payout ratio represents the portion of earnings paid to shareholders in dividends. A lower number typically signals good reinvestment prospects and a sustainable dividend.

The average payout ratio for West Pharmaceutical Services (WST) over the last 20 years is 26.69%, significantly below the 65% threshold. The data variability shows only one year (2004) surpassing the threshold at 67.57%. This low and controlled payout ratio is indicative of a conservative and healthily sustainable strategy for returning value to shareholders. The company is reinvesting a majority of its earnings back into the business, a good sign of growth potential and future profitability for long-term investors. Overall, this trend is highly positive and demonstrates prudent financial management by WST.

Dividends Well Covered by Earnings?

The dividend payout ratio compares the dividends paid to shareholders against the company's net income. It is expressed as a percentage. A lower ratio indicates that the company is retaining more of its earnings for reinvestment, whereas a higher ratio can indicate a more generous dividend policy but can also imply potential risks concerning earnings coverage.

From the given data, it is evident that the dividend payout ratio for West Pharmaceutical Services (WST) has generally been decreasing over the years. The calculated ratios vary, starting from approximately 0.37 in 2003 and gradually decreasing to around 0.1 in 2023. Specifically: - 2003 to 2012: The payout ratios ranged between 0.3 and 0.67, indicating a moderately balanced approach in paying out dividends while retaining earnings. - 2013 to 2019: The ratios stayed under 0.35, indicating a shift towards more retained earnings for growth and other purposes. - 2020 to 2023: The ratios plummeted to under 0.15, with 2021 having an extremely low ratio of 0.077. This suggests a significant increase in the company's earnings without proportionally increasing dividends. This trend is favorable for the company's financial health as it indicates that dividends are well-covered by earnings, minimizing the risk of over-leveraging or exhausting reserves. A lower payout ratio implies that the company has robust earnings generation and is conservative in its distribution, maintaining a good cushion for future uncertainties. However, from an investor's perspective, those seeking high dividend returns might find the lower payout less attractive.

Dividends Well Covered by Cash Flow?

Dividends well covered by cash flow is a critical measure to ensure a company's dividends are sustainable. This is measured by comparing free cash flow to dividend payout, with a higher ratio indicating better coverage and sustainability of dividend payments.

The free cash flow and dividend payout data for West Pharmaceutical Services (WST) over the last 20 years reveal a declining trend in cash flow coverage for dividends. From 2003 to recent years, the coverage ratio has dropped from 1.40 to around 0.14, indicating that the company's free cash flow is now only slightly more than one-tenth the size of its dividend payout. Positive outliers were seen in 2003 and 2004 with coverage exceeding 1, but recent years show worrying signs with ratios less than 0.3, suggesting dividends are less well covered by cash flow. This trend is considered unfavorable as it implies that without significant improvement, dividend sustainability could be at risk.

Stable Dividends Since the Company Began Paying Dividends?

Stable dividend payments, avoiding drops of more than 20%, attract income-seeking investors by ensuring consistent returns.

Over the last 20 years, West Pharmaceutical Services (WST) demonstrated remarkable stability in its dividends per share. Starting from $0.2025 in 2003 and steadily increasing annually to $0.77 in 2023, WST hasn't experienced any drop remotely close to 20%. In fact, this upward trend indicates a reliable commitment to shareholders, which is highly valued by income-focused investors. This encouraging pattern points to the company's resilient financial health and its solid capacity to generate and distribute profits consistently.

Dividends Paid for Over 25 Years?

This criterion evaluates if a company has a consistent history of paying dividends for over 25 years, indicating stability and commitment to returning value to shareholders.

West Pharmaceutical Services (WST) shows a history of dividend payments over the past 25 years, with dividends per share (DPS) starting from $0.1525 in 1998 and increasing to $0.77 in 2023. This demonstrates consistent growth in dividends, revealing a strong commitment to returning capital to shareholders and signaling financial stability. Such a long history of sustained and growing dividends is typically a positive indicator, suggesting that WST is a well-managed company with a reliable cash flow. This trend is favorable for long-term investors seeking income and capital appreciation.

Reliable Stock Repurchases Over the Past 20 Years?

Reliable stock repurchases involve a company consistently buying back its shares, which generally signals confidence in the business and can enhance shareholder value by reducing the shares outstanding.

Over the past 20 years, West Pharmaceutical Services (WST) has shown instances of stock repurchases, but not in a highly consistent manner. The number of shares outstanding decreased only in a few years: 2008, 2012, 2013, 2018, 2019, 2020, and 2023. This would average to approximately 1.2616 years of repurchases annually. However, the overall trend shows fluctuations, with some years showing an increase in shares. Hence, the repurchasing pattern is relatively weak and inconsistent. Given that a consistent buyback strategy is often seen as a strong positive signal by investors, WST's inconsistent approach in this regard may not provide the strongest vote of confidence. This inconsistent trend can be viewed as suboptimal for investors seeking assurance in the company’s use of capital for share buybacks.