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Don't Buy Spire Healthcare Group plc (LON:SPI) For Its Next Dividend Without Doing These Checks

Simply Wall St

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Spire Healthcare Group plc (LON:SPI) is about to trade ex-dividend in the next 3 days. You will need to purchase shares before the 14th of November to receive the dividend, which will be paid on the 10th of December.

Spire Healthcare Group's next dividend payment will be UK£0.01 per share, and in the last 12 months, the company paid a total of UK£0.04 per share. Last year's total dividend payments show that Spire Healthcare Group has a trailing yield of 3.2% on the current share price of £1.17. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Spire Healthcare Group can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Spire Healthcare Group

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Last year, Spire Healthcare Group paid out 93% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. A useful secondary check can be to evaluate whether Spire Healthcare Group generated enough free cash flow to afford its dividend. Fortunately, it paid out only 31% of its free cash flow in the past year.

It's good to see that while Spire Healthcare Group's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

LSE:SPI Historical Dividend Yield, November 10th 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Spire Healthcare Group's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 37% a year over the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, five years ago, Spire Healthcare Group has lifted its dividend by approximately 16% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Spire Healthcare Group is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

The Bottom Line

Is Spire Healthcare Group worth buying for its dividend? It's never great to see earnings per share declining, especially when a company is paying out 93% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Wondering what the future holds for Spire Healthcare Group? See what the ten analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.