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It looks like Healthcare Services Group, Inc. (NASDAQ:HCSG) is about to go ex-dividend in the next four days. Investors can purchase shares before the 19th of November in order to be eligible for this dividend, which will be paid on the 24th of December.
Healthcare Services Group's next dividend payment will be US$0.20 per share, on the back of last year when the company paid a total of US$0.82 to shareholders. Based on the last year's worth of payments, Healthcare Services Group stock has a trailing yield of around 3.6% on the current share price of $22.98. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Healthcare Services Group is paying out an acceptable 67% 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. Thankfully its dividend payments took up just 40% of the free cash flow it generated, which is a comfortable payout ratio.
It's positive to see that Healthcare Services Group'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?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's encouraging to see Healthcare Services Group has grown its earnings rapidly, up 31% a year for the past five years. Management appears to be striking a nice balance between reinvesting for growth and paying dividends to shareholders. Earnings per share have been growing quickly and in combination with some reinvestment and a middling payout ratio, the stock may have decent dividend prospects going forwards.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Healthcare Services Group has delivered an average of 3.9% per year annual increase in its dividend, based on the past 10 years of dividend payments. Earnings per share have been growing much quicker than dividends, potentially because Healthcare Services Group is keeping back more of its profits to grow the business.
The Bottom Line
Should investors buy Healthcare Services Group for the upcoming dividend? We like Healthcare Services Group's growing earnings per share and the fact that - while its payout ratio is around average - it paid out a lower percentage of its cash flow. Healthcare Services Group looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
Curious what other investors think of Healthcare Services Group? See what analysts 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.
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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