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Should Income Investors Look At Sonic Healthcare Limited (ASX:SHL) Before Its Ex-Dividend?

Simply Wall St

Readers hoping to buy Sonic Healthcare Limited (ASX:SHL) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You can purchase shares before the 10th of September in order to receive the dividend, which the company will pay on the 25th of September.

Sonic Healthcare's next dividend payment will be AU$0.51 per share, on the back of last year when the company paid a total of AU$0.84 to shareholders. Looking at the last 12 months of distributions, Sonic Healthcare has a trailing yield of approximately 2.9% on its current stock price of A$29.12. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Sonic Healthcare can afford its dividend, and if the dividend could grow.

View our latest analysis for Sonic Healthcare

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. Sonic Healthcare paid out more than half (69%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether Sonic Healthcare generated enough free cash flow to afford its dividend. It paid out 79% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

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.

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

ASX:SHL Historical Dividend Yield, September 5th 2019

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at Sonic Healthcare, with earnings per share up 4.9% on average over the last five years. A high payout ratio of 69% generally happens when a company can't find better uses for the cash. Combined with slim earnings growth in the past few years, Sonic Healthcare could be signalling that its future growth prospects are thin.

We'd also point out that Sonic Healthcare issued a meaningful number of new shares in the past year. It's hard to grow dividends per share when a company keeps creating new shares.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, Sonic Healthcare has lifted its dividend by approximately 4.5% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

The Bottom Line

From a dividend perspective, should investors buy or avoid Sonic Healthcare? Earnings per share growth has been unremarkable, and while the company is paying out a majority of its earnings and cash flow in the form of dividends, the dividend payments don't appear excessive. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.

Ever wonder what the future holds for Sonic Healthcare? See what the nine analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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.