Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Universal Health Realty Income Trust (NYSE:UHT) is about to trade ex-dividend in the next 3 days. Investors can purchase shares before the 13th of September in order to be eligible for this dividend, which will be paid on the 30th of September.
Universal Health Realty Income Trust's next dividend payment will be US$0.68 per share. Last year, in total, the company distributed US$2.72 to shareholders. Based on the last year's worth of payments, Universal Health Realty Income Trust has a trailing yield of 2.8% on the current stock price of $96.46. If you buy this business for its dividend, you should have an idea of whether Universal Health Realty Income Trust's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. It paid out 85% 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. We'd be concerned if earnings began 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. A useful secondary check can be to evaluate whether Universal Health Realty Income Trust generated enough free cash flow to afford its dividend. It paid out 90% 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.
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. With that in mind, we're encouraged by the steady growth at Universal Health Realty Income Trust, with earnings per share up 3.9% on average over the last five years. A payout ratio of 85% looks like a tacit signal from management that reinvestment opportunities in the business are low. In line with limited earnings growth in recent years, this is not the most appealing combination.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Universal Health Realty Income Trust has increased its dividend at approximately 1.4% a year on average.
To Sum It Up
Is Universal Health Realty Income Trust an attractive dividend stock, or better left on the shelf? 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. 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.
Keen to explore more data on Universal Health Realty Income Trust's financial performance? Check out our visualisation of its historical revenue and earnings growth.
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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.