Third Age Health Services (NZSE:TAH) Is Paying Out A Larger Dividend Than Last Year

Third Age Health Services Limited (NZSE:TAH) has announced that it will be increasing its dividend from last year's comparable payment on the 15th of November to NZ$0.0355. This takes the dividend yield to 4.7%, which shareholders will be pleased with.

Check out our latest analysis for Third Age Health Services

Third Age Health Services' Future Dividends May Potentially Be At Risk

A big dividend yield for a few years doesn't mean much if it can't be sustained. Before this announcement, Third Age Health Services was paying out 72% of earnings, but a comparatively small 40% of free cash flows. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.

EPS is set to grow by 5.5% over the next year if recent trends continue. If the dividend continues on its recent course, the payout ratio in 12 months could be 95%, which is a bit high and could start applying pressure to the balance sheet.

Third Age Health Services' Dividend Has Lacked Consistency

Even in its short history, we have seen the dividend cut. Since 2021, the annual payment back then was NZ$0.0391, compared to the most recent full-year payment of NZ$0.101. This works out to be a compound annual growth rate (CAGR) of approximately 37% a year over that time. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.

The Dividend Has Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Third Age Health Services has impressed us by growing EPS at 5.5% 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.

Our Thoughts On Third Age Health Services' Dividend

Overall, it's great to see the dividend being raised and that it is still in a sustainable range. The payout ratio looks good, but unfortunately the company's dividend track record isn't stellar. This looks like it could be a good dividend stock going forward, but we would note that the payout ratio has been at higher levels in the past so it could happen again.

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. Taking the debate a bit further, we've identified 2 warning signs for Third Age Health Services that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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