Is MedFirst Healthcare Services, Inc. (GTSM:4175) A Good Fit For Your Dividend Portfolio?

Is MedFirst Healthcare Services, Inc. (GTSM:4175) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.

With a 3.0% yield and a seven-year payment history, investors probably think MedFirst Healthcare Services looks like a reliable dividend stock. While the yield may not look too great, the relatively long payment history is interesting. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we’ll go through this below.

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GTSM:4175 Historical Dividend Yield, February 19th 2020
GTSM:4175 Historical Dividend Yield, February 19th 2020

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. MedFirst Healthcare Services paid out 45% of its profit as dividends, over the trailing twelve month period. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Unfortunately, while MedFirst Healthcare Services pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it’s not ideal from a dividend perspective.

Is MedFirst Healthcare Services’s Balance Sheet Risky?

As MedFirst Healthcare Services has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA is a measure of a company’s total debt. Net interest cover measures the ability to meet interest payments. Essentially we check that a) the company does not have too much debt, and b) that it can afford to pay the interest. With net debt of 2.39 times its EBITDA, MedFirst Healthcare Services has a noticeable amount of debt, although if business stays steady, this may not be overly concerning.

Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company’s net interest expense. MedFirst Healthcare Services has interest cover of more than 12 times its interest expense, which we think is quite strong.

We update our data on MedFirst Healthcare Services every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Looking at the data, we can see that MedFirst Healthcare Services has been paying a dividend for the past seven years. Although it has been paying a dividend for several years now, the dividend has been cut at least once, and we’re cautious about the consistency of its dividend across a full economic cycle. During the past seven-year period, the first annual payment was NT$0.94 in 2013, compared to NT$2.16 last year. This works out to be a compound annual growth rate (CAGR) of approximately 13% a year over that time. MedFirst Healthcare Services’s dividend payments have fluctuated, so it hasn’t grown 13% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

It’s not great to see that the payment has been cut in the past. We’re generally more wary of companies that have cut their dividend before, as they tend to perform worse in an economic downturn.

Dividend Growth Potential

With a relatively unstable dividend, it’s even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there’s a good chance of bigger dividends in future? MedFirst Healthcare Services’s earnings per share have been essentially flat over the past five years. Flat earnings per share are acceptable for a time, but over the long term, the purchasing power of the company’s dividends could be eroded by inflation. MedFirst Healthcare Services is paying out less than half of its earnings, which we like. Earnings per share growth have grown slowly, which is not great, but if the retained earnings can be reinvested effectively, future growth may be stronger.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Firstly, the company has a conservative payout ratio, although we’d note that its cashflow in the past year was substantially lower than its reported profit. Second, earnings have been essentially flat, and its history of dividend payments is chequered – having cut its dividend at least once in the past. In sum, we find it hard to get excited about MedFirst Healthcare Services from a dividend perspective. It’s not that we think it’s a bad business; just that there are other companies that perform better on these criteria.

You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in MedFirst Healthcare Services stock.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.