Is CareTrust REIT, Inc.’s (NASDAQ:CTRE) 3.8% Dividend Worth Your Time?

Is CareTrust REIT, Inc. (NASDAQ:CTRE) a good dividend stock? How would you know? A dividend paying company with growing earnings can be rewarding in the long term. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.

With a four-year payment history and a 3.8% yield, many investors probably find CareTrust REIT intriguing. The yield does look pretty interesting. Some simple analysis can offer a lot of insight when buying a company for its dividend, and we’ll go through these below.

Click the interactive chart for our full dividend analysis
NasdaqGS:CTRE Historical Dividend Yield, April 22nd 2019
NasdaqGS:CTRE Historical Dividend Yield, April 22nd 2019

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. So we need to be form a view on if a company’s dividend is sustainable, relative to its net profit after tax. CareTrust REIT paid out 62% of its profit as dividends, over the trailing twelve month period. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business – which could be good or bad.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. The company paid out 65%, which is not bad per se, but does start to limit the amount of cash CareTrust REIT has available to meet other needs.

CareTrust REIT pays out most of its earnings, although companies in the real estate industry often have different rules governing their dividends.

Is CareTrust REIT’s Balance Sheet Risky?

As CareTrust REIT has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks.

A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA measures a company’s total debt load relative to its earnings (lower = less debt), while net interest cover measures the company’s ability to pay the interest on its debt (higher = greater ability to pay interest costs). With net debt of above 3x EBITDA, investors are starting to take on a meaningful amount of risk, should the business enter a downturn.

We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company’s net interest expense. With EBIT of 3.01 times its interest expense, CareTrust REIT’s interest cover is starting to look a bit thin.

We update our data on CareTrust REIT every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. CareTrust REIT has been paying a dividend for the past four years. The company has been paying a stable dividend for a few years now, but we’d like to see more evidence of consistency over a longer period. During the past four-year period, the first annual payment was US$0.50 in 2015, compared to US$0.90 last year. This works out to be a compound annual growth rate (CAGR) of approximately 16% a year over that time.

The dividend has been growing pretty quickly, which could be enough to get us interested even though the dividend history is relatively short. Further research may be warranted.

Dividend Growth Potential

The other half of the dividend investing equation is evaluating whether earnings per share (EPS) are growing. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient’s purchasing power. It’s good to see CareTrust REIT has been growing its earnings per share at 51% a year over the past 5 years. Earnings per share are sharply up, but we wonder if paying out more than half its earnings (leaving less for reinvestment) is an implicit signal that CareTrust REIT’s growth will be slower in the future.

We’d also point out that CareTrust REIT issued a meaningful number of new shares in the past year. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus – perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. First, we think CareTrust REIT is paying out an acceptable percentage of its cashflow and profit. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we’d like. Ultimately, CareTrust REIT comes up short on our dividend analysis. It’s not that we think it is a bad company – just that there are likely more appealing dividend prospects out there on this analysis.

Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 6 analysts we track are forecasting for CareTrust REIT for free with public analyst estimates for the company.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.