In this series, we analyze financial metrics to begin answering the following questions about a company's dividend:

  1. Over time, has this company steadily increased its payouts?
  2. How sustainable is the dividend?
  3. Does the company have room to further increase the dividend?

The Dividend Report Card wasn't designed as a buy or sell signal but rather as a tool to gauge the health of a company's dividend. For a full explanation of each category, click here for a tutorial.

Today's pupil is Bristol-Myers Squibb (NYSE: BMY), which posts a 5.2% yield.

Dividend history

Metric

5-Year Annualized Growth Rate

Dividend per share 2.9%

Source: Bristol-Myers Squibb investor relations.

Bristol-Myers Squibb's dividend track record leaves a little something to be desired, especially when inflation (as measured by the CPI) was around 2.1% annualized over the same period.

Based on the low growth rate, Bristol-Myers Squibb scores a 2 of 5 in this category.

Sustainability

 Metric

Trailing 12 Months

Final Grade
Weighting

Report Card Score
(out of 5)

Interest coverage 43.2 times 10% 5
EPS payout ratio 71% 10% 4
FCFE payout ratio 86.8% 30% 3

Source: Capital IQ, a division of Standard & Poor's, as of Feb. 24.

Bristol-Myers Squibb has one of the better balance sheets in the market (Morningstar gives it a credit rating of "AA+") as it can cover its interest payments many times over and it has a relatively low debt-to-capital ratio of 25.8%.

The company pays out a large percentage of its earnings and free cash flow out as dividends, however, and with the blockbuster drug Plavix coming off patent in 2012, investors would be wise to monitor these payout ratios in the coming years.

Growth

Metric 

Trailing 12 Months

Final Grade
Weighting

Report Card Score
(out of 5)

EPS payout ratio 71% 10% 3
FCFE payout ratio 86.8% 20% 2
Sustainable growth rate 8.6% 10% 4

According to Capital IQ, the median analyst estimate for long-term EPS growth is 1.6%. When you take that rather lacklustre outlook with the fact that Bristol-Myers already pays out the bulk of its earnings as dividends, the dividend growth potential appears to be rather modest.

A 3% dividend growth rate over the next five years may not be great, but it may not be terrible, either, when you consider the 5.2% starting yield.

Competitors
An "ungraded" section of the dividend report card is to see how a stock's current yield stacks up against that of direct competitors. If it's too high relative to competitors' yields, the board could be tempted to slow the growth rate, or vice versa, to bring it more in line with the industry average.

Company

Dividend Yield

Est. Long-Term EPS Growth

Pfizer (NYSE: PFE) 4.3% 2%
Merck (NYSE: MRK) 4.7% 5%
Eli Lilly (NYSE: LLY) 5.8% (7%)

Compared to this group, Bristol Myers's current yield at 5.3% doesn't seem too high or too low relative to analyst earnings growth estimates of 1.6%.

Pencils down!
With all the numbers in, here's how Bristol-Myers's dividend scored:

Weighting

Category

Final Grade

10%

History

2

  Sustainability  

10%

Interest Coverage

5

10%

EPS Payout Ratio

4

30%

FCFE Payout Ratio

3

  Growth  

10%

EPS Payout Ratio

3

20%

FCFE Payout Ratio

2

10%

Sustainable growth

4

100%

Total Score (out of 5)

3.1

  Final Grade

C+

There are a number of high-yielding pharmaceutical stocks in the market today and with some major patent expirations coming up, selectivity is paramount. Bristol-Myers isn't without its risks, but it is one worth considering if you're looking to add some pharmaceutical exposure to your dividend-focused portfolio.

Want some more dividend ideas? Click here for a free report from Motley Fool expert analysts: "13 High-Yielding Stocks to Buy Today."

Todd Wenning is advisor of Motley Fool UK Dividend Edge. He does not own shares of any company mentioned. Pfizer is a Motley Fool Inside Value pick. The Fool has a disclosure policy.