Healthcare Services Group, Inc. (NASDAQ:HCSG) will increase its dividend on the 23rd of December to US$0.21. This will take the dividend yield to an attractive 4.1%, providing a nice boost to shareholder returns.
Healthcare Services Group Doesn't Earn Enough To Cover Its Payments
If the payments aren't sustainable, a high yield for a few years won't matter that much. Before this announcement, Healthcare Services Group was paying out 87% of earnings, but a comparatively small 42% of free cash flows. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.
EPS is set to fall by 10.8% over the next 12 months. Assuming the dividend continues along recent trends, we believe the payout ratio could reach 100%, which could put the dividend under pressure if earnings don't start to improve.
Healthcare Services Group Has A Solid Track Record
The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. The dividend has gone from US$0.63 in 2011 to the most recent annual payment of US$0.84. This works out to be a compound annual growth rate (CAGR) of approximately 3.0% a year over that time. While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is less attractive.
Healthcare Services Group May Find It Hard To Grow The Dividend
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Unfortunately, Healthcare Services Group's earnings per share has been essentially flat over the past five years, which means the dividend may not be increased each year. Healthcare Services Group's earnings per share has barely grown, which is not ideal - perhaps this is why the company pays out the majority of its earnings to shareholders. That's fine as far as it goes, but we're less enthusiastic as this often signals that the dividend is likely to grow slower in the future.
Our Thoughts On Healthcare Services Group's Dividend
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The company has been bring in plenty of cash to cover the dividend, but we don't necessarily think that makes it a great dividend stock. We would be a touch cautious of relying on this stock primarily for the dividend income.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 1 warning sign for Healthcare Services Group that investors should know about before committing capital to this stock. We have also put together a list of global stocks with a solid dividend.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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