Netcare Limited (JSE:NTC) is reducing its dividend from last year's comparable payment to ZAR0.30 on the 30th of January. This means the annual payment is 2.8% of the current stock price, which is above the average for the industry.
Check out our latest analysis for Netcare
Netcare's Earnings Easily Cover The Distributions
We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. The last payment made up 91% of earnings, but cash flows were much higher. This leaves plenty of cash for reinvestment into the business.
Looking forward, earnings per share is forecast to rise by 124.7% over the next year. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 34% which would be quite comfortable going to take the dividend forward.
Dividend Volatility
The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2012, the annual payment back then was ZAR0.528, compared to the most recent full-year payment of ZAR0.40. This works out to be a decline of approximately 2.7% per year over that time. A company that decreases its dividend over time generally isn't what we are looking for.
The Dividend Has Limited Growth Potential
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Netcare's EPS has fallen by approximately 10% per year during the past five years. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough. Over the next year, however, earnings are actually predicted to rise, but we would still be cautious until a track record of earnings growth can be built.
Our Thoughts On Netcare's Dividend
In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. We would be a touch cautious of relying on this stock primarily for the dividend income.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 1 warning sign for Netcare that investors need to be conscious of moving forward. Is Netcare not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.