It looks like Extendicare Inc. (TSE:EXE) is about to go ex-dividend in the next three days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled 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 28th of January, you won't be eligible to receive the dividend, when it is paid on the 15th of February.
The company's upcoming dividend is CA$0.04 a share, following on from the last 12 months, when the company distributed a total of CA$0.48 per share to shareholders. Looking at the last 12 months of distributions, Extendicare has a trailing yield of approximately 6.7% on its current stock price of CA$7.17. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. 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. Extendicare distributed an unsustainably high 158% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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. Extendicare paid out more free cash flow than it generated - 139%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.
Cash is slightly more important than profit from a dividend perspective, but given Extendicare's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.
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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at Extendicare, with earnings per share up 2.4% on average over the last five years. With slack earnings growth and paying out substantially more than it reported in profit last year, this dividend is potentially at risk of being cut.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Extendicare's dividend payments per share have declined at 5.4% per year on average over the past 10 years, which is uninspiring. Extendicare is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
Is Extendicare an attractive dividend stock, or better left on the shelf? The dividends are not well covered by either income or free cash flow, although at least earnings per share are slowly increasing. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Extendicare.
Although, if you're still interested in Extendicare and want to know more, you'll find it very useful to know what risks this stock faces. For example, we've found 3 warning signs for Extendicare (2 are potentially serious!) that deserve your attention before investing in the shares.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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. 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.