Readers hoping to buy Universal Health Realty Income Trust (NYSE:UHT) 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 13th of September, you won’t be eligible to receive this dividend, when it is paid on the 30th of September.
Universal Health Realty Income Trust’s next dividend payment will be US$0.68 per share, and in the last 12 months, the company paid a total of US$2.72 per share. Last year’s total dividend payments show that Universal Health Realty Income Trust has a trailing yield of 2.8% on the current share price of $96.46. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.
Check out our latest analysis for Universal Health Realty Income Trust
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. 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. Over the last year, it paid out more than three-quarters (90%) 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 Universal Health Realty Income Trust’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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it’s a relief to see Universal Health Realty Income Trust earnings per share are up 3.9% per annum 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. Since the start of our data, ten years ago, Universal Health Realty Income Trust has lifted its dividend by approximately 1.4% a year on average.
To Sum It Up
Should investors buy Universal Health Realty Income Trust for the upcoming dividend? 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. While it does have some good things going for it, we’re a bit ambivalent and it would take more to convince us of Universal Health Realty Income Trust’s dividend merits.
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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