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Readers hoping to buy U.S. Physical Therapy, Inc. (NYSE:USPH) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Ex-dividend means that investors that purchase the stock on or after the 13th of May will not receive this dividend, which will be paid on the 11th of June.
U.S. Physical Therapy's upcoming dividend is US$0.35 a share, following on from the last 12 months, when the company distributed a total of US$1.40 per share to shareholders. Last year's total dividend payments show that U.S. Physical Therapy has a trailing yield of 1.2% on the current share price of $119.16. If you buy this business for its dividend, you should have an idea of whether U.S. Physical Therapy's dividend is reliable and sustainable. 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. U.S. Physical Therapy paid out just 14% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. 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. What's good is that dividends were well covered by free cash flow, with the company paying out 4.3% of its cash flow last year.
It's positive to see that U.S. Physical Therapy'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?
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. This is why it's a relief to see U.S. Physical Therapy earnings per share are up 8.4% per annum over the last five years. Earnings per share have been growing at a decent rate, and the company is retaining more than three-quarters of its earnings in the business. This is an attractive combination, because when profits are reinvested effectively, growth can compound, with corresponding benefits for earnings and dividends in the future.
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, 10 years ago, U.S. Physical Therapy has lifted its dividend by approximately 16% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
To Sum It Up
Is U.S. Physical Therapy worth buying for its dividend? Earnings per share growth has been growing somewhat, and U.S. Physical Therapy is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and U.S. Physical Therapy is halfway there. Overall we think this is an attractive combination and worthy of further research.
With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. For example - U.S. Physical Therapy has 2 warning signs we think you should be aware of.
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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