Don't Buy U.S. Physical Therapy, Inc. (NYSE:USPH) For Its Next Dividend Without Doing These Checks

It looks like U.S. Physical Therapy, Inc. (NYSE:USPH) is about to go ex-dividend in the next 4 days. Typically, the ex-dividend date is one business day before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. This means that investors who purchase U.S. Physical Therapy's shares on or after the 14th of March will not receive the dividend, which will be paid on the 11th of April.

The company's upcoming dividend is US$0.45 a share, following on from the last 12 months, when the company distributed a total of US$1.76 per share to shareholders. Based on the last year's worth of payments, U.S. Physical Therapy stock has a trailing yield of around 2.2% on the current share price of US$80.84. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for U.S. Physical Therapy

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Last year, U.S. Physical Therapy paid out 96% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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. Fortunately, it paid out only 40% of its free cash flow in the past year.

It's good to see that while U.S. Physical Therapy's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see U.S. Physical Therapy's earnings per share have dropped 5.7% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. U.S. Physical Therapy has delivered an average of 14% per year annual increase in its dividend, based on the past 10 years of dividend payments. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. U.S. Physical Therapy is already paying out 96% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Has U.S. Physical Therapy got what it takes to maintain its dividend payments? It's never great to see earnings per share declining, especially when a company is paying out 96% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. It's not that we think U.S. Physical Therapy is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that being said, if you're still considering U.S. Physical Therapy as an investment, you'll find it beneficial to know what risks this stock is facing. Case in point: We've spotted 1 warning sign for U.S. Physical Therapy you should be aware of.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.