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Cardinal Health, Inc. (NYSE:CAH) is about to trade ex-dividend in the next four days. You can purchase shares before the 31st of December in order to receive the dividend, which the company will pay on the 15th of January.
Cardinal Health's next dividend payment will be US$0.49 per share. Last year, in total, the company distributed US$1.94 to shareholders. Calculating the last year's worth of payments shows that Cardinal Health has a trailing yield of 3.6% on the current share price of $53.8. If you buy this business for its dividend, you should have an idea of whether Cardinal Health's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Cardinal Health is paying out an acceptable 58% of its profit, a common payout level among most companies. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. The good news is it paid out just 23% of its free cash flow in the last year.
It's positive to see that Cardinal Health's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That explains why we're not overly excited about Cardinal Health's flat earnings over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Cardinal Health has increased its dividend at approximately 11% a year on average.
The Bottom Line
Has Cardinal Health got what it takes to maintain its dividend payments? We're not enthused by the flat earnings per share, although at least the company's payout ratio is within reasonable bounds. Additionally, it paid out a lower percentage of its free cash flow, so at least it generated more cash than it spent on dividends. All things considered, we are not particularly enthused about Cardinal Health from a dividend perspective.
So if you want to do more digging on Cardinal Health, you'll find it worthwhile knowing the risks that this stock faces. Our analysis shows 2 warning signs for Cardinal Health and you should be aware of these before buying any shares.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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