We Wouldn't Be Too Quick To Buy Third Age Health Services Limited (NZSE:TAH) Before It Goes Ex-Dividend

Third Age Health Services Limited (NZSE:TAH) stock is about to trade ex-dividend in four days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Meaning, you will need to purchase Third Age Health Services' shares before the 6th of June to receive the dividend, which will be paid on the 20th of June.

The company's upcoming dividend is NZ$0.026 a share, following on from the last 12 months, when the company distributed a total of NZ$0.049 per share to shareholders. Based on the last year's worth of payments, Third Age Health Services has a trailing yield of 3.3% on the current stock price of NZ$1.47. If you buy this business for its dividend, you should have an idea of whether Third Age Health Services's dividend is reliable and sustainable. As a result, readers should always check whether Third Age Health Services has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Third Age Health Services

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. Third Age Health Services paid out 73% of its earnings to investors last year, a normal payout level for most businesses. 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. Over the last year it paid out 62% of its free cash flow as dividends, within the usual range for most companies.

It's positive to see that Third Age Health Services'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.

Click here to see how much of its profit Third Age Health Services paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Third Age Health Services's earnings per share have plummeted approximately 62% a year over the previous five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, two years ago, Third Age Health Services has lifted its dividend by approximately 12% a year on average. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.

The Bottom Line

Should investors buy Third Age Health Services for the upcoming dividend? While earnings per share are shrinking, it's encouraging to see that at least Third Age Health Services's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. Bottom line: Third Age Health Services has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that being said, if you're still considering Third Age Health Services as an investment, you'll find it beneficial to know what risks this stock is facing. To that end, you should learn about the 4 warning signs we've spotted with Third Age Health Services (including 2 which make us uncomfortable).

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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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.