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Readers hoping to buy CareTech Holdings PLC (LON:CTH) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order 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. Therefore, if you purchase CareTech Holdings' shares on or after the 21st of October, you won't be eligible to receive the dividend, when it is paid on the 19th of November.
The company's next dividend payment will be UK£0.046 per share. Last year, in total, the company distributed UK£0.13 to shareholders. Looking at the last 12 months of distributions, CareTech Holdings has a trailing yield of approximately 2.1% on its current stock price of £6.25. If you buy this business for its dividend, you should have an idea of whether CareTech Holdings's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. CareTech Holdings paid out a comfortable 28% of its profit last year. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. The good news is it paid out just 21% of its free cash flow in the last year.
It's positive to see that CareTech Holdings's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see CareTech Holdings has grown its earnings rapidly, up 27% a year for the past five years. CareTech Holdings is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.
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, CareTech Holdings has lifted its dividend by approximately 9.3% 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.
Should investors buy CareTech Holdings for the upcoming dividend? CareTech Holdings has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. There's a lot to like about CareTech Holdings, and we would prioritise taking a closer look at it.
So while CareTech Holdings looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. For example, we've found 2 warning signs for CareTech Holdings that we recommend you consider before investing in the business.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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.
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