Extendicare Inc. (TSE:EXE) will pay a dividend of CA$0.04 on the 15th of November. The dividend yield will be 6.6% based on this payment which is still above the industry average.
Extendicare's Dividend Is Well Covered By Earnings
If the payments aren't sustainable, a high yield for a few years won't matter that much. Before this announcement, Extendicare was paying out 73% of earnings, but a comparatively small 66% of free cash flows. This leaves plenty of cash for reinvestment into the business.
Over the next year, EPS could expand by 17.0% if recent trends continue. If the dividend continues on this path, the payout ratio could be 62% by next year, which we think can be pretty sustainable going forward.
Extendicare's Track Record Isn't Great
The company hasn't been particularly volatile, but it has been steadily decreasing which of course is not what investors like to see. Since 2011, the dividend has gone from CA$0.84 to CA$0.48. Doing the maths, this is a decline of about 5.4% per year. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.
The Dividend Looks Likely To Grow
With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS is growing. Extendicare has seen EPS rising for the last five years, at 17% per annum. Past earnings growth has been decent, but unless this is one of those rare businesses that can grow without additional capital investment or marketing spend, we'd generally expect the higher payout ratio to limit its future growth prospects.
We Really Like Extendicare's Dividend
Overall, we think that this is a great income investment, and we think that maintaining the dividend this year may have been a conservative choice. The company is easily earning enough to cover its dividend payments and it is great to see that these earnings are being translated into cash flow. All in all, this checks a lot of the boxes we look for when choosing an income stock.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 3 warning signs for Extendicare that investors need to be conscious of moving forward. We have also put together a list of global stocks with a solid dividend.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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