Select Medical Holdings (NYSE:SEM) Will Pay A Dividend Of US$0.13

Select Medical Holdings Corporation (NYSE:SEM) has announced that it will pay a dividend of US$0.13 per share on the 1st of June. This makes the dividend yield 2.1%, which will augment investor returns quite nicely.

View our latest analysis for Select Medical Holdings

Select Medical Holdings' Earnings Easily Cover the Distributions

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Prior to this announcement, Select Medical Holdings' earnings easily covered the dividend, but free cash flows were negative. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.

EPS is set to fall by 9.7% over the next 12 months. If the dividend continues along recent trends, we estimate the payout ratio could be 27%, which we consider to be quite comfortable, with most of the company's earnings left over to grow the business in the future.

Select Medical Holdings' Dividend Has Lacked Consistency

Select Medical Holdings has been paying dividends for a while, but the track record isn't stellar. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. Since 2013, the first annual payment was US$0.40, compared to the most recent full-year payment of US$0.50. This works out to be a compound annual growth rate (CAGR) of approximately 2.5% a year over that time. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.

The Dividend Looks Likely To Grow

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Select Medical Holdings has seen EPS rising for the last five years, at 33% per annum. A low payout ratio gives the company a lot of flexibility, and growing earnings also make it very easy for it to grow the dividend.

Our Thoughts On Select Medical Holdings' Dividend

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Select Medical Holdings' payments, as there could be some issues with sustaining them into the future. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. We would be a touch cautious of relying on this stock primarily for the dividend income.

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. Just as an example, we've come across 3 warning signs for Select Medical Holdings you should be aware of, and 1 of them is significant. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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