Healthcare Services Group (NASDAQ:HCSG) Is Increasing Its Dividend To $0.2138

Healthcare Services Group, Inc. (NASDAQ:HCSG) will increase its dividend from last year's comparable payment on the 23rd of September to $0.2138. This takes the dividend yield to 6.1%, which shareholders will be pleased with.

See our latest analysis for Healthcare Services Group

Healthcare Services Group Is Paying Out More Than It Is Earning

If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, the dividend made up 212% of earnings, and the company was generating negative free cash flows. Paying out such a large dividend compared to earnings while also not generating free cash flows is a major warning sign for the sustainability of the dividend as these levels are certainly a bit high.

Earnings per share is forecast to rise by 57.1% over the next year. If the dividend continues on its recent course, the payout ratio in 12 months could be 138%, which is a bit high and could start applying pressure to the balance sheet.

Healthcare Services Group Has A Solid Track Record

Even over a long history of paying dividends, the company's distributions have been remarkably stable. Since 2012, the dividend has gone from $0.64 total annually to $0.855. This works out to be a compound annual growth rate (CAGR) of approximately 2.9% a year over that time. While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is less attractive.

The Dividend Has Limited Growth Potential

The company's investors will be pleased to have been receiving dividend income for some time. However, things aren't all that rosy. Over the past five years, it looks as though Healthcare Services Group's EPS has declined at around 19% a year. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this becomes a long term trend.

Healthcare Services Group's Dividend Doesn't Look Sustainable

Overall, we always like to see the dividend being raised, but we don't think Healthcare Services Group will make a great income stock. In the past the payments have been stable, but we think the company is paying out too much for this to continue for the long term. We don't think Healthcare Services Group is a great stock to add to your portfolio if income is your focus.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Healthcare Services Group has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about. 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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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.