Readers hoping to buy Extendicare Inc. (TSE:EXE) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Investors can purchase shares before the 30th of March in order to be eligible for this dividend, which will be paid on the 15th of April.
Extendicare’s upcoming dividend is CA$0.04 a share, following on from the last 12 months, when the company distributed a total of CA$0.48 per share to shareholders. Looking at the last 12 months of distributions, Extendicare has a trailing yield of approximately 9.0% on its current stock price of CA$5.32. If you buy this business for its dividend, you should have an idea of whether Extendicare’s dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Last year, Extendicare paid out 251% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. A useful secondary check can be to evaluate whether Extendicare generated enough free cash flow to afford its dividend. Over the last year, it paid out dividends equivalent to 310% of what it generated in free cash flow, a disturbingly high percentage. Unless there were something in the business we’re not grasping, this could signal a risk that the dividend may have to be cut in the future.
Cash is slightly more important than profit from a dividend perspective, but given Extendicare’s payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. This is why it’s a relief to see Extendicare earnings per share are up 8.7% per annum over the last five years. Earnings per share have been growing steadily, although a payout ratio this high suggests future growth is likely to slow, and the dividend may also be at risk of a cut if business enters a downturn.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Extendicare has seen its dividend decline 5.4% per annum on average over the past ten years, which is not great to see. 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
From a dividend perspective, should investors buy or avoid Extendicare? Extendicare is paying out an uncomfortably high percentage of both earnings and cash flow as dividends, although at least earnings per share are growing somewhat. Bottom line: Extendicare has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
So if you’re still interested in Extendicare despite it’s poor dividend qualities, you should be well informed on some of the risks facing this stock. To that end, you should learn about the 4 warning signs we’ve spotted with Extendicare (including 3 which can’t be ignored).
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.
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.
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. Thank you for reading.