Medifast, Inc. (NYSE:MED) stock is about to trade ex-dividend in 3 days time. This means that investors who purchase shares on or after the 26th of September will not receive the dividend, which will be paid on the 7th of November.
Medifast's next dividend payment will be US$0.8 per share, on the back of last year when the company paid a total of US$3.0 to shareholders. Calculating the last year's worth of payments shows that Medifast has a trailing yield of 2.8% on the current share price of $107.99. 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! We need to see whether the dividend is covered by earnings and if it's growing.
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. Medifast paid out a comfortable 45% of its profit last year. A useful secondary check can be to evaluate whether Medifast generated enough free cash flow to afford its dividend. Fortunately, it paid out only 49% of its free cash flow in the past year.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's comforting to see Medifast's earnings have been skyrocketing, up 25% per annum for the past five years. Medifast is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.
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, four years ago, Medifast has lifted its dividend by approximately 32% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
The Bottom Line
Has Medifast got what it takes to maintain its dividend payments? We love that Medifast is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. It's a promising combination that should mark this company worthy of closer attention.
Curious what other investors think of Medifast? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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 firstname.lastname@example.org. 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.