Medifast, Inc. (NYSE:MED) Passed Our Checks, And It's About To Pay A US$1.64 Dividend

By
Simply Wall St
Published
March 23, 2022
NYSE:MED
Source: Shutterstock

Medifast, Inc. (NYSE:MED) stock is about to trade ex-dividend in 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase Medifast's shares on or after the 28th of March will not receive the dividend, which will be paid on the 9th of May.

The company's next dividend payment will be US$1.64 per share, on the back of last year when the company paid a total of US$5.68 to shareholders. Last year's total dividend payments show that Medifast has a trailing yield of 3.6% on the current share price of $181.67. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Medifast can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Medifast

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Fortunately Medifast's payout ratio is modest, at just 41% of profit. A useful secondary check can be to evaluate whether Medifast generated enough free cash flow to afford its dividend. The company paid out 106% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

Medifast paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Medifast 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.

historic-dividend
NYSE:MED Historic Dividend March 23rd 2022

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's comforting to see Medifast's earnings have been skyrocketing, up 57% per annum for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Medifast has delivered an average of 37% per year annual increase in its dividend, based on the past six years of dividend payments. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

To Sum It Up

Is Medifast worth buying for its dividend? We like that Medifast has been successfully growing its earnings per share at a nice rate and reinvesting most of its profits in the business. However, we note the high cashflow payout ratio with some concern. Overall, it's hard to get excited about Medifast from a dividend perspective.

In light of that, while Medifast has an appealing dividend, it's worth knowing the risks involved with this stock. For example - Medifast has 2 warning signs we think you should be aware of.

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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