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Why It Might Not Make Sense To Buy CoreCivic, Inc. (NYSE:CXW) For Its Upcoming Dividend

Simply Wall St

Readers hoping to buy CoreCivic, Inc. (NYSE:CXW) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 30th of September, you won't be eligible to receive this dividend, when it is paid on the 15th of October.

CoreCivic's upcoming dividend is US$0.4 a share, following on from the last 12 months, when the company distributed a total of US$1.8 per share to shareholders. Looking at the last 12 months of distributions, CoreCivic has a trailing yield of approximately 9.7% on its current stock price of $18.09. 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.

View our latest analysis for CoreCivic

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. CoreCivic is paying out an acceptable 71% of its profit, a common payout level among most companies. While CoreCivic seems to be paying out a very high percentage of its income, REITs have different dividend payment behaviour and so, while we don't think this is great, we also don't think it is unusual. 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. It paid out more than half (68%) of its free cash flow in the past year, which is within an average range for most companies.

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 how much of its profit CoreCivic paid out over the last 12 months.

NYSE:CXW Historical Dividend Yield, September 26th 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. CoreCivic's earnings per share have fallen at approximately 11% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. CoreCivic has delivered 10% dividend growth per year on average over the past eight years. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.

To Sum It Up

Is CoreCivic an attractive dividend stock, or better left on the shelf? It's never good to see earnings per share shrinking, but at least the dividend payout ratios appear reasonable. We're aware though that if earnings continue to decline, the dividend could be at risk. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Want to learn more about CoreCivic? Here's a visualisation of its historical rate of revenue and earnings growth.

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.