It Might Not Be A Great Idea To Buy UnitedHealth Group Incorporated (NYSE:UNH) For Its Next Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see UnitedHealth Group Incorporated (NYSE:UNH) is about to trade ex-dividend in the next 2 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. This means that investors who purchase UnitedHealth Group's shares on or after the 16th of September will not receive the dividend, which will be paid on the 24th of September.

The company's next dividend payment will be US$2.10 per share, on the back of last year when the company paid a total of US$8.40 to shareholders. Calculating the last year's worth of payments shows that UnitedHealth Group has a trailing yield of 1.4% on the current share price of US$588.42. If you buy this business for its dividend, you should have an idea of whether UnitedHealth Group's dividend is reliable and sustainable. So we need to investigate whether UnitedHealth Group can afford its dividend, and if the dividend could grow.

See our latest analysis for UnitedHealth Group

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. UnitedHealth Group paid out more than half (51%) of its earnings last year, which is a regular payout ratio for most companies. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. UnitedHealth Group paid out more free cash flow than it generated - 115%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

While UnitedHealth Group's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were UnitedHealth Group to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see UnitedHealth Group earnings per share are up 4.2% per annum over the last five years. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, UnitedHealth Group has lifted its dividend by approximately 22% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

The Bottom Line

Has UnitedHealth Group got what it takes to maintain its dividend payments? Earnings per share have grown somewhat, although UnitedHealth Group paid out over half its profits and the dividend was not well covered by free cash flow. Bottom line: UnitedHealth Group has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of UnitedHealth Group don't faze you, it's worth being mindful of the risks involved with this business. Be aware that UnitedHealth Group is showing 4 warning signs in our investment analysis, and 1 of those is concerning...

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.