Healthcare Services Group, Inc. (NASDAQ:HCSG) the dividend will increase from the payout for the same period last year to $0.2138 on September 23. This will bring the dividend yield to an attractive 6.1%, giving shareholder returns a nice boost.
Check out our latest analysis for Healthcare Services Group
The health services group does not earn enough to cover its payments
A big dividend yield for a few years doesn’t mean much if it can’t be sustained. Prior to this announcement, the dividend was 212% of earnings and the company was generating negative free cash flow. Paying such a large dividend to earnings while generating no free cash flow would certainly be hard to follow.
The next 12 months should see EPS grow by 56.1%. Assuming the dividend continues on recent trends, we believe the payout ratio could reach 138%, which probably cannot continue without putting some pressure on the balance sheet.
The healthcare services group has a strong track record
The company has a steady history of paying dividends with very little fluctuation. The dividend has gone from an annual total of $0.64 in 2012 to the most recent total annual payment of $0.855. This equates to a compound annual growth rate (CAGR) of approximately 2.9% per year during this period. Dividends have been growing relatively slowly, which isn’t great, but some investors may appreciate the relative consistency of the dividend.
Dividend growth potential is fragile
Investors might be drawn to the stock because of the quality of its payment history. Let’s not jump to conclusions, because things might not be as good as they seem on the surface. Earnings per share have fallen 19% over the past five years. A sharp drop in earnings per share is not great from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall enough. It’s not all bad news though, as earnings are expected to rise over the next 12 months – we’d just be a bit cautious until this becomes a long-term trend.
Dividend could prove unreliable
In summary, while it’s always good to see the dividend increase, we don’t think Healthcare Services Group’s payouts are strong. We can’t deny that the payouts have been very stable, but we are a bit worried about the very high payout rate. Overall, we don’t think this company has the makings of a good income stock.
Investors generally tend to favor companies with a consistent and stable dividend policy as opposed to those with an irregular one. At the same time, there are other factors that our readers should be aware of before investing capital in a stock. For example, we encountered 3 warning signs for Healthcare Services Group you should be aware, and one of them doesn’t sit well with us. Looking for more high yield dividend ideas? Try our collection of strong dividend payers.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.