Sigma Healthcare Limited (ASX:SIG) has announced that it will pay a dividend of AU$0.01 per share on the 22nd of April. The dividend yield will be 3.9% based on this payment which is still above the industry average.

View our latest analysis for Sigma Healthcare

Sigma Healthcare's Distributions May Be Difficult To Sustain

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Even in the absence of profits, Sigma Healthcare is paying a dividend. Along with this, it is also not generating free cash flows, which raises concerns about the sustainability of the dividend.

Recent, EPS has fallen by 24.6%, so this could continue over the next year. This will push the company into unprofitability, which means the managers will have to choose between suspending the dividend, or paying it out of cash reserves.

Dividend Volatility

The company's dividend history has been marked by instability, with at least 1 cut in the last 10 years. The dividend has gone from AU$0.03 in 2012 to the most recent annual payment of AU$0.02. The dividend has shrunk at around 4.0% a year during that period. A company that decreases its dividend over time generally isn't what we are looking for.

Dividend Growth Potential Is Shaky

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Sigma Healthcare's EPS has fallen by approximately 25% per year during the past five years. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future.

Sigma Healthcare's Dividend Doesn't Look Great

In summary, while it is good to see that the dividend hasn't been cut, we think that at current levels the payment isn't particularly sustainable. The company isn't making enough to be paying as much as it is, and the other factors don't look particularly promising either. We don't think that this is a great candidate to be an income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 1 warning sign for Sigma Healthcare that you should be aware of before investing. Is Sigma Healthcare not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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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.