Only Two Days Left To Cash In On Extendicare's (TSE:EXE) Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Extendicare Inc. (TSE:EXE) is about to trade ex-dividend in the next 2 days. Typically, the ex-dividend date is one business day before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Therefore, if you purchase Extendicare's shares on or after the 30th of June, you won't be eligible to receive the dividend, when it is paid on the 15th of July.

The company's next dividend payment will be CA$0.042 per share, and in the last 12 months, the company paid a total of CA$0.49 per share. Based on the last year's worth of payments, Extendicare stock has a trailing yield of around 3.5% on the current share price of CA$13.81. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Extendicare can afford its dividend, and if the dividend could grow.

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Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Extendicare is paying out an acceptable 53% of its profit, a common payout level among most companies. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Dividends consumed 54% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's positive to see that Extendicare'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.

See our latest analysis for Extendicare

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's encouraging to see Extendicare has grown its earnings rapidly, up 41% a year for the past five years. The current payout ratio suggests a good balance between rewarding shareholders with dividends, and reinvesting in growth. With a reasonable payout ratio, profits being reinvested, and some earnings growth, Extendicare could have strong prospects for future increases to the dividend.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. It looks like the Extendicare dividends are largely the same as they were 10 years ago.

Final Takeaway

Should investors buy Extendicare for the upcoming dividend? Higher earnings per share generally lead to higher dividends from dividend-paying stocks over the long run. That's why we're glad to see Extendicare's earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow - 53% and 54% respectively. In summary, while it has some positive characteristics, we're not inclined to race out and buy Extendicare today.

While it's tempting to invest in Extendicare for the dividends alone, you should always be mindful of the risks involved. Every company has risks, and we've spotted 1 warning sign for Extendicare you should know about.

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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.