Today we’ll take a closer look at Utah Medical Products, Inc. (NASDAQ:UTMD) from a dividend investor’s perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Unfortunately, it’s common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
While Utah Medical Products’s 1.2% dividend yield is not the highest, we think its lengthy payment history is quite interesting. There are a few simple ways to reduce the risks of buying Utah Medical Products for its dividend, and we’ll go through these below.
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable – hardly an ideal situation. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 24% of Utah Medical Products’s profits were paid out as dividends in the last 12 months. We’d say its dividends are thoroughly covered by earnings.
We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. Unfortunately, while Utah Medical Products pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it’s not ideal from a dividend perspective.
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of Utah Medical Products’s dividend payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past ten-year period, the first annual payment was US$0.90 in 2009, compared to US$1.10 last year. Dividends per share have grown at approximately 2.0% per year over this time.
Slow and steady dividend growth might not sound that exciting, but dividends have been stable for ten years, which we think is seriously impressive.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Utah Medical Products has grown its earnings per share at 8.1% per annum over the past five years. A low payout ratio and strong historical earnings growth suggests Utah Medical Products has been effectively reinvesting in its business. We think this generally bodes well for its dividend prospects.
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Utah Medical Products has a low payout ratio, which we like, although it paid out virtually all of its generated cash. It hasn’t demonstrated a strong ability to grow earnings per share, but we like that the dividend payments have been fairly consistent. Utah Medical Products has a number of positive attributes, but it falls slightly short of our (admittedly high) standards. Were there evidence of a strong moat or an attractive valuation, it could still be well worth a look.
Are management backing themselves to deliver performance? Check their shareholdings in Utah Medical Products in our latest insider ownership analysis.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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