Ramsay Health Care Limited (ASX:RHC) stock is about to trade ex-dividend in four days. If you purchase the stock on or after the 8th of March, you won't be eligible to receive this dividend, when it is paid on the 31st of March.
Ramsay Health Care's next dividend payment will be AU$0.48 per share. Last year, in total, the company distributed AU$0.97 to shareholders. Calculating the last year's worth of payments shows that Ramsay Health Care has a trailing yield of 1.4% on the current share price of A$67.27. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.
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. Fortunately Ramsay Health Care's payout ratio is modest, at just 44% of profit. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Luckily it paid out just 9.4% of its free cash flow last year.
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?
Companies with falling earnings are riskier for dividend shareholders. 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 discomforted by Ramsay Health Care's 9.9% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
We'd also point out that Ramsay Health Care issued a meaningful number of new shares in the past year. It's hard to grow dividends per share when a company keeps creating new shares.
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, 10 years ago, Ramsay Health Care has lifted its dividend by approximately 8.3% a year on average.
To Sum It Up
From a dividend perspective, should investors buy or avoid Ramsay Health Care? Ramsay Health Care has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. 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.
While it's tempting to invest in Ramsay Health Care for the dividends alone, you should always be mindful of the risks involved. For instance, we've identified 4 warning signs for Ramsay Health Care (1 is significant) you should be aware of.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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