Extendicare Inc. (TSE:EXE) is about to trade ex-dividend in the next 2 days. Investors can purchase shares before the 30th of December in order to be eligible for this dividend, which will be paid on the 15th of January.
Extendicare's next dividend payment will be CA$0.04 per share. Last year, in total, the company distributed CA$0.48 to shareholders. Based on the last year's worth of payments, Extendicare stock has a trailing yield of around 7.2% on the current share price of CA$6.62. 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 Extendicare can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Extendicare distributed an unsustainably high 128% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the last year it paid out 71% of its free cash flow as dividends, within the usual range for most companies.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Extendicare fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.
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 Extendicare has grown its earnings rapidly, up 24% a year for the past five years.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Extendicare has seen its dividend decline 5.4% per annum on average over the past 10 years, which is not great to see. It's unusual to see earnings per share increasing at the same time as dividends per share have been in decline. We'd hope it's because the company is reinvesting heavily in its business, but it could also suggest business is lumpy.
To Sum It Up
From a dividend perspective, should investors buy or avoid Extendicare? Extendicare has been growing its earnings per share nicely, although judging by the difference between its profit and cashflow payout ratios, the company might have reported some write-offs over the last year. Overall, it's hard to get excited about Extendicare from a dividend perspective.
However if you're still interested in Extendicare as a potential investment, you should definitely consider some of the risks involved with Extendicare. For example, Extendicare has 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.
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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