Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that HCP, Inc. (NYSE:HCP) is about to go ex-dividend in just 3 days. This means that investors who purchase shares on or after the 2nd of August will not receive the dividend, which will be paid on the 20th of August.
HCP's next dividend payment will be US$0.37 per share, and in the last 12 months, the company paid a total of US$1.48 per share. Last year's total dividend payments show that HCP has a trailing yield of 4.6% on the current share price of $32.08. If you buy this business for its dividend, you should have an idea of whether HCP's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is 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. It paid out 91% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. It could become a concern if earnings started to decline. That said, REITs are often required by law to distribute all of their earnings, and it's not unusual to see a REIT with a payout ratio around 100%. We wouldn't read too much into this. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the last year, it paid out more than three-quarters (86%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.
It's positive to see that HCP'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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at HCP, with earnings per share up 3.0% on average over the last five years. A high payout ratio of 91% generally happens when a company can't find better uses for the cash. Combined with slim earnings growth in the past few years, HCP could be signalling that its future growth prospects are thin.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. HCP's dividend payments per share have declined at 2.0% per year on average over the past 10 years, which is uninspiring. 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
Is HCP an attractive dividend stock, or better left on the shelf? Earnings per share have been growing modestly and HCP paid out a bit over half of its earnings and free cash flow last year. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we're not all that optimistic on its dividend prospects.
Curious what other investors think of HCP? 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.
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