Roche Holding AG is a global pharmaceutical company that develops and distributes drugs for a number of medical issues including cancer, HIV, obesity and arthritis. The company was founded in 1896, and in 2014, it generated over $47 billion in sales treating over 19 million patients.

Roche has a vast portfolio of drugs in the marketplace and over 60 different drugs and drug combinations in various stages of clinical trials. The company's primary focus has been on developing cancer and immunotherapy treatments, but it has had success with multiple sclerosis and hepatitis C treatments as of November 2015. Roche generates significant revenue and cash flow, but increased attention being given to drug pricing could place pressure on the company in the near future.

As of Nov. 18, 2015, Roche had a dividend yield 3.24%; its dividend is paid once annually. Roche began paying a dividend in 2005 and has been consistently raising it every year up until 2015, when it slightly dropped its dividend payment from $1.098 per share to $1.084 per share. Roche's financial situation coupled with its dividend payment history suggests a company that has the strength to continue paying its dividend going forward. A deeper dive into the company's financial statements helps confirm the security of the dividend.

Roche's Dividend History

Roche's annual dividend yield has remained around 3% since the beginning of 2009. Roche's first dividend payment in 2005 was $0.211 per share, and since then, it has grown by an average of over 17% per year to its present level of $1.084 per share. The company's dividend yield of 3.24% as of Nov. 18, 2015, puts in on par with the dividend yields of competitors such as Merck, Novartis and Pfizer. However, the yield is over double that of the Health Care Select Sector SPDR ETF.

Dividend Payout Ratio

The dividend payout ratio is a simple financial calculation that looks at what percentage of a company's net income is used to pay its dividends to shareholders. Cash-intensive businesses that operate in more traditionally defensive sectors generally have the ability to pay out greater percentages of income as dividends. Growth-oriented companies tend to have lower payout ratios as they usually reinvest more capital back into the business.

For 2014, Roche had a dividend payout ratio of 70%. This is higher than its ratios of 56% in 2013 and 61% in 2012, but it does not suggest a company that is overstretching itself to pay out the dividend. While Merck and Novartis have trailing 12-month dividend payout ratios of under 50% each as of Nov. 18, 2015, Pfizer's payout ratio is above 80%. Given that Roche has been generating over $10 billion in net income and nearly $50 billion in revenue annually over the past few years, this means the company has the ability to continue paying the dividend.

Free Cash Flow Payout Ratio

Free cash flow is defined as the operating cash flow that remains after the company invests in itself. This is the money a company can use to pay dividends, pay down debt or buy back company stock. Like the dividend payout ratio, cash-intensive businesses have the ability to commit a larger percentage of cash flow to dividend payments.

Roche's free cash flow payout ratio is in strong shape. Its payout ratio of just 52% in 2014 is consistent with payout ratios in prior years. The stock's price to free cash flow ratio is lower than those of all its major competitors except Pfizer, suggesting that not only are cash flows strong, but shareholders are getting good relative value for their investments.

After capital expenditures and dividend payments have been made, Roche has generated excess free cash flow of almost $22 billion combined from 2012-2014, indicating the company is a strong cash flow generator and the dividend is secure.

Interest Coverage Ratio

The interest coverage ratio is a means of determining how much of a company's net income is going toward interest payments on its debt. Too much of a company's income that goes towards debt service means less is available to potentially go toward dividend payments. A ratio below 2 could suggest the interest expense is getting high.

Roche's interest coverage ratio in 2014 was 7.87. This means the company is generating enough net income to cover its annual interest expense almost eight times over. This number has actually come down recently as the interest coverage ratio was over 10 in 2013. In any event, a ratio above 7 indicates the company's interest expense is not problematic and should not interfere with its ability to pay the dividend.

Given that Roche generates approximately $14 billion in free cash flow annually and pays less than $2 billion in interest, the company's financial situation is strong.

Long-Term Debt-to-Equity Ratio

The long-term debt-to-equity (D/E) ratio provides a measure of how much debt the company has built up compared to how much equity is in the company. Shareholder equity is the difference between a company's total assets and its liabilities. If a company's long-term debt burden is 100% of its shareholder equity or more, it could be at risk of being too highly leveraged without a strong balance sheet to support it.

Roche had a long-term D/E ratio of 99% in 2014. In isolation, that ratio could suggest trouble but Roche has the strong balance sheet to support it. Companies often issue debt as a way to borrow funds cheaply to earn higher returns over the long term. Interest rates remain at historically low levels. Considering Roche's ability to drive revenues and cash flow coupled with the fact that the company's overall debt load has been coming down since 2010, the long-term D/E ratio does not seem to suggest a red flag.

Individuals considering making an investment in Roche to earn its 3% dividend should feel comfortable that the dividend is secure going forward. The company has demonstrated it is generating more than enough cash flow to cover dividends, interest and CapEx expenses, and still has plenty left over. Roche has been growing the dividend consistently over the past decade and that growth can reasonably be expected to continue for the foreseeable future.

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