Dividends play an important role in compounding returns in the long run and end up forming a sizeable part of investment returns. Historically, Ramsay Health Care Limited (ASX:RHC) has paid a dividend to shareholders. It currently yields 2.7%. Should it have a place in your portfolio? Let’s take a look at Ramsay Health Care in more detail.
How I analyze a dividend stock
If you are a dividend investor, you should always assess these five key metrics:
- Does it pay an annual yield higher than 75% of dividend payers?
- Has its dividend been stable over the past (i.e. no missed payments or significant payout cuts)?
- Has it increased its dividend per share amount over the past?
- Is its earnings sufficient to payout dividend at the current rate?
- Will the company be able to keep paying dividend based on the future earnings growth?
How well does Ramsay Health Care fit our criteria?
The company currently pays out 77% of its earnings as a dividend, according to its trailing twelve-month data, which means that the dividend is covered by earnings. However, going forward, analysts expect RHC’s payout to fall to 52% of its earnings. Assuming a constant share price, this equates to a dividend yield of 3.0%. However, EPS should increase to A$2.8, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.
If you want to dive deeper into the sustainability of a certain payout ratio, you may wish to consider the cash flow of the business. A company with strong cash flow, relative to earnings, can sometimes sustain a high pay out ratio.
Reliablity is an important factor for dividend stocks, particularly for income investors who want a strong track record of payment and a positive outlook for future payout. RHC has increased its DPS from A$0.33 to A$1.44 in the past 10 years. It has also been paying out dividend consistently during this time, as you’d expect for a company increasing its dividend levels. This is an impressive feat, which makes RHC a true dividend rockstar.
Compared to its peers, Ramsay Health Care generates a yield of 2.7%, which is on the low-side for Healthcare stocks.
Taking into account the dividend metrics, Ramsay Health Care ticks most of the boxes as a strong dividend investment, putting it in my list of top dividend payers. Given that this is purely a dividend analysis, you should always research extensively before deciding whether or not a stock is an appropriate investment for you. I always recommend analysing the company’s fundamentals and underlying business before making an investment decision. Below, I’ve compiled three fundamental aspects you should look at:
- Future Outlook: What are well-informed industry analysts predicting for RHC’s future growth? Take a look at our free research report of analyst consensus for RHC’s outlook.
- Valuation: What is RHC worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether RHC is currently mispriced by the market.
- Other Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.