The Organon Co. (OGN) cut its dividend because of net debt, leverage, and capital allocation priorities. Additionally, changing economic and business conditions have created uncertainty for the pharmaceutical company. The firm’s dividend was constant for 15 quarters.
The share price has declined almost continuously since the spinoff. Investors exited this dividend stock because of worries about poor operating results, leverage, and a possible dividend cut. Depending on earnings results and how quickly leverage is reduced, another cut may occur in the future.
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Overview of Organon & Co.
Organon & Co. traces its history to 1923. The firm was a part of Akzo Nobel for many years before it was acquired by Schering-Plough in 2007. Organon became a part of Merck & Co. after it acquired Schering-Plough. The business was spun off as a publicly traded company on June 3, 2021. Today, Organon focuses on women’s health, biosimilars, and established brands. The established brands business sells generics in international markets. Important brands and drugs are Nexplanon, NuvaRing, Follistim, Hadlima, etc.
Total revenue was $6,403 million in 2024 and $6,294 million in the past twelve months.
Dividend Cut Announcement
During the first quarter fiscal 2025 results announcement on Friday, May 1st, Organon Co. (OGN) reduced its dividend. The company’s quarterly dividend rate was $0.28 per share before the announcement. The dividend is now $0.02 per share, a 90% reduction. In the quarterly results on May 1st, the press release stated,
“Today, Organon’s Board of Directors declared a quarterly dividend of $0.02 for each issued and outstanding share of the company’s common stock. This is a revision from the company’s prior quarterly dividend rate of $0.28 per share. The dividend is payable on June 12, 2025, to stockholders of record at the close of business on May 12, 2025.”
Later, in the earnings call transcript, the company’s CEO and other leadership stated,
“Today, we also announced that we have reset our dividend payout and will redirect those funds to debt reduction. With a reduced dividend payout, the company can redeploy almost $200 million in prospective dividend payments over the remainder of 2025 that will enable a path to achieve a net leverage ratio below 4 by year-end.”
“We have developed a core capability in finding opportunities like Emgality and Vtama. These are accretive transactions with deal structures heavily weighted towards success-based milestones. These are the types of assets that over time, we will have greater opportunity to pursue with the capital freed up from the dividend.”
“So, share buybacks have been a lower priority for us on our roster of capital allocation priorities. The biggest issues we face that can improve Organon’s valuation in the near term relate to managing our leverage and relate to growth. And we need capital to solve both of those issues. And so, returning capital to shareholders is right now less of a priority. It’s one of the reasons why we made the move that we did with the dividend announcement today.”
Effect of the Change
By completing an approximately 90% dividend cut, Organon sought to lower its dividend rate to provide financial flexibility because of high leverage and potential deals for new therapies. Debt and required payments are hindering growth. The company’s dividend rate has been constant since it started issuing one, so it did not have a streak. The result is less free cash flow is required for the dividend payout, allowing the pharmaceutical maker to focus on its capital allocation priorities.
Challenges
Organon has high total and net debt, leverage, and, conversely, low-interest coverage. The global economic environment and uncertain tariff rates are also significant risks.
Debt and Leverage
Organon is a leveraged firm. It currently has roughly 2.73X interest coverage and about a 4.78X leverage ratio. Its non-investment grade speculative credit rating of BB/Ba2 reflects these values—the firm desires to reduce its leverage to below 4.0X. Reducing the dividend distribution will allow more free cash flow for debt payment.
Tariffs and Economic Uncertainty
As an international pharmaceutical company, Organon faces significant risks from tariffs. The challenge is that the tariff policy is unstable and arbitrarily changed. They have stated that current tariffs have limited exposure in 2025 because of its existing inventory. However, if tariffs trend higher or extend longer than anticipated, they may affect Organon.
Dividend Safety
Organon’s dividend safety was poor because of flat revenue and declining earnings per share (“EPS”). Earnings per share peaked at the spinoff and exhibited a decreasing trend annually. They are expected to decrease to $3.86 per share in 2025.
The chart below shows that the dividend yield has been over 10% twice, most recently before the cut. This value usually suggests a distressed company. After reducing the dividend by approximately 90%, the forward dividend yield is around 0.92% now. The annual rate is $0.08 per share.
The annual dividend now requires about $20.8 million ($0.08 yearly dividend x 260 million shares), compared to $297 million in FY 2024. In addition, based on consensus 2025 estimates of $3.86, the calculated payout ratio will be around 2%. We expect the annual difference in cash flow requirements to allow the company to pay down debt, reduce leverage below 4.0X, and conduct deals.
Although the dividend is in a better position and more secure now, the firm’s dividend is not entirely safe. Poor operating results or failure to reduce leverage may force another dividend cut. Also, Organon receives a B+/B3 highly speculative grade from the credit rating agencies.
In addition, the restaurant firm receives a dividend quality grade of ‘F’ from Portfolio Insight. Hence, Organon scored at the bottom of all dividend stocks tracked. We view the equity as at risk for another dividend cut depending on how rapidly it can lower leverage.
Final Thoughts on the Organon (OGN) Dividend Cut
Organon has paid a consistent dividend since it was divested from Merck. However, poor operating results caused revenue to remain flat and EPS to decline. In addition, leverage is too high, and cash flow is required for the firm’s capital allocation strategy. The high yield also indicated a distressed firm. As a result, Organon cut its dividend. Even though the dividend is currently safe, we view Organon as at risk for another cut.
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.