Extendicare (TSE:EXE) Is Due To Pay A Dividend Of CA$0.04

Extendicare Inc. (TSE:EXE) has announced that it will pay a dividend of CA$0.04 per share on the 15th of June. This means the annual payment is 5.9% of the current stock price, which is above the average for the industry.

View our latest analysis for Extendicare

Extendicare's Earnings Easily Cover the Distributions

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, Extendicare was paying out 87% of earnings and more than 75% of free cash flows. This indicates that the company is more focused on returning cash to shareholders than growing the business, but we don't think that there are necessarily signs that the dividend might be unsustainable.

If the trend of the last few years continues, EPS will grow by 18.3% over the next 12 months. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 73% which would be quite comfortable going to take the dividend forward.

Extendicare's Track Record Isn't Great

The dividend hasn't seen any major cuts in the last 10 years, but it has slowly been decreasing. Since 2011, the first annual payment was CA$0.84, compared to the most recent full-year payment of CA$0.48. The dividend has shrunk at around 5.4% a year during that period. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.

Extendicare's Dividend Might Lack Growth

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. We are encouraged to see that Extendicare has grown earnings per share at 18% per year over the past five years. The payout ratio is very much on the higher end, which could mean that the growth rate will slow down in the future, and that could flow through to the dividend as well.

In Summary

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. In the past the payments have been stable, but we think the company is paying out too much for this to continue for the long term. We would be a touch cautious of relying on this stock primarily for the dividend income.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've identified 3 warning signs for Extendicare (2 are concerning!) that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.

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