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We Wouldn't Be Too Quick To Buy CareTech Holdings PLC (LON:CTH) Before It Goes Ex-Dividend

Simply Wall St

It looks like CareTech Holdings PLC (LON:CTH) is about to go ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 24th of October will not receive this dividend, which will be paid on the 21st of November.

CareTech Holdings's next dividend payment will be UK£0.04 per share, on the back of last year when the company paid a total of UK£0.1 to shareholders. Looking at the last 12 months of distributions, CareTech Holdings has a trailing yield of approximately 2.9% on its current stock price of £3.77. 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! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for CareTech Holdings

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. Last year CareTech Holdings paid out 100% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. A useful secondary check can be to evaluate whether CareTech Holdings generated enough free cash flow to afford its dividend. It paid out more than half (57%) of its free cash flow in the past year, which is within an average range for most companies.

It's good to see that while CareTech Holdings's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

AIM:CTH Historical Dividend Yield, October 20th 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. Readers will understand then, why we're concerned to see CareTech Holdings's earnings per share have dropped 25% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. CareTech Holdings has delivered 11% dividend growth per year on average over the past ten years. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. CareTech Holdings is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

To Sum It Up

Is CareTech Holdings an attractive dividend stock, or better left on the shelf? Earnings per share have been shrinking in recent times. Additionally, CareTech Holdings is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Curious what other investors think of CareTech Holdings? 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.

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.