Do These 3 Checks Before Buying Civitas Social Housing PLC (LON:CSH) For Its Upcoming Dividend

Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Civitas Social Housing PLC (LON:CSH) is about to go ex-dividend in just 3 days. If you purchase the stock on or after the 14th of November, you won’t be eligible to receive this dividend, when it is paid on the 29th of November.

Civitas Social Housing’s upcoming dividend is UK£0.01 a share, following on from the last 12 months, when the company distributed a total of UK£0.05 per share to shareholders. Calculating the last year’s worth of payments shows that Civitas Social Housing has a trailing yield of 5.8% on the current share price of £0.87. 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! As a result, readers should always check whether Civitas Social Housing has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Civitas Social Housing

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Civitas Social Housing paid out 118% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. It’s not unusual to see REITs distributing all of their income to shareholders. Yet a payout ratio this high we feel is still cause for concern as it suggests the dividend is being funded from cash on the balance sheet, or by borrowing. A useful secondary check can be to evaluate whether Civitas Social Housing generated enough free cash flow to afford its dividend. Over the past year it paid out 118% of its free cash flow as dividends, which is uncomfortably high. We’re curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

As Civitas Social Housing’s dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Click here to see how much of its profit Civitas Social Housing paid out over the last 12 months.

LSE:CSH Historical Dividend Yield, November 10th 2019
LSE:CSH Historical Dividend Yield, November 10th 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. From this perspective, we’re disturbed to see earnings per share plunged 41% over the last 12 months, and we’d wonder if the company has had some kind of major event that has skewed the calculation.

The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. In the last two years, Civitas Social Housing has lifted its dividend by approximately 30% a year on average. That’s intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Civitas Social Housing is already paying out a high percentage of its income, so without earnings growth, we’re doubtful of whether this dividend will grow much in the future.

The Bottom Line

Has Civitas Social Housing got what it takes to maintain its dividend payments? Not only are earnings per share declining, but Civitas Social Housing is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. It’s not that we think Civitas Social Housing is a bad company, but these characteristics don’t generally lead to outstanding dividend performance.

Want to learn more about Civitas Social Housing’s dividend performance? Check out this visualisation of its historical revenue and earnings growth.

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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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.