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Why Dividend Investors Shouldn't Bother With Thermo Fisher

By David Jagielski – Aug 18, 2021 at 10:10AM

Key Points

  • The company's current dividend yield of 0.19% is far below the S&P 500 average of about 1.3%.
  • Income investors could be leaving lots of recurring income on the table by choosing Thermo Fisher's stock.
  • Thermo Fisher has been raising its payouts at a high rate over the past few years, but even that may not be enough to make it worthwhile.

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You could be waiting a long time for the dividend to catch up to that of higher-paying stocks.

Recurring dividend income can be a great way to help pay your bills and bolster your savings. And while high-yielding stocks are great, you don't always need to avoid stocks with payouts that are currently lower; if those payouts grow over time, they could earn you a lot more in the future. Of course, in other cases, an ultra-low yield is just not attractive, even at a high rate of growth.

Thermo Fisher Scientific (TMO -0.90%), which has raised its dividend in recent years, isn't worth your time if your priority is dividend income. While the scientific products company itself is solid and could make for a great long-term investment, from a dividend standpoint, there are much better options out there.

Business woman making a presentation.

Image source: Getty Images.

A look at the company's track record

Thermo Fisher currently pays its shareholders a quarterly dividend of $0.26, which yields just 0.19%. That's nowhere near even the S&P 500 average of about 1.3%. If you were to invest $100,000 into Thermo Fisher stock, you would earn just $190 from it on annual basis. Meanwhile, if you were to invest that amount into an average S&P stock, you could be earning about $1,300 -- nearly seven times that amount.

To its credit, however, Thermo Fisher has been raising its dividend payments over the years, meaning that $190 could grow over time. Certainly, given its payout ratio of just 4%, Thermo Fisher clearly has lots of room to raise its dividend payments. Its free cash flow of $8.1 billion over the past 12 months is well in excess of the $364 million the company paid out in dividends during that time.

However, the company doesn't have a strong track record for raising dividends and has only been doing so consistently for the past few years. From the $0.15 that it was paying in early 2018, it has hiked its payouts by 73%, with the most recent increase in December bringing an 18% boost from $0.22 to $0.26.

If the company were to make those generous 18% rate hikes the norm for the next five years, its quarterly dividend would end up at $0.59. That means if you were to buy the stock today, you could be earning 0.43% in dividends based on your original investment (i.e., your dividend income per year would be closer to $430). That's still nowhere near the S&P 500 average. Another healthcare stock, biopharmaceutical company Gilead Sciences (GILD -0.91%), pays around 4%, and even if it made no further increases to its payouts, it could still be a better dividend stock to own.

How it compares to Gilead over the long haul

Even if Thermo Fisher were to do the unthinkable and increase its dividend every year at a rate of 18% while Gilead Sciences didn't raise its payouts at all, it would still take nearly two decades for the dividend to be as high-yielding.

Gilead actually has been making increases to its dividend payments in recent years, but the point here is that even if it stopped doing so, it would likely take quite a long time for Thermo Fisher to catch up. And this still doesn't factor in all the dividend income you will likely miss out on from holding the lower-yielding stock during those years. 

This doesn't mean Thermo Fisher is a bad investment

A company like Thermo Fisher that is always looking for ways to grow may simply not want to tie up its money with a dividend payout. The business has done a great job of growing over the years, with revenue of $32 billion in 2020 rising by more than 76% since 2016's $18 billion. Acquisitions have played a key role in that growth, so it's understandable that the company wants to keep its cash balance strong. Earlier this year, it announced a $17 billion acquisition of contract researcher PPD.

For growth investors, Thermo Fisher is arguably a better buy than a stock like Gilead despite the lower dividend yield. Over the past five years, its shares have soared more than 250%, far above the S&P 500's returns of 103%; Gilead's stock is nowhere close, declining by more than 10% during that time frame. Ultimately, it depends on your priority. If your focus is on dividends, then a higher-yielding stock like Gilead is a better option than Thermo Fisher. But if that isn't the case, then Thermo Fisher may still be the better buy.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Gilead Sciences. The Motley Fool has a disclosure policy.

Stocks Mentioned

Thermo Fisher Scientific Stock Quote
Thermo Fisher Scientific
$557.94 (-0.90%) $-5.06
Gilead Sciences Stock Quote
Gilead Sciences
$88.22 (-0.91%) $0.81
PPD, Inc. Stock Quote
PPD, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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