Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see UDG Healthcare plc (LON:UDG) is about to trade ex-dividend in the next 3 days. You can purchase shares before the 9th of January in order to receive the dividend, which the company will pay on the 5th of February.
UDG Healthcare's upcoming dividend is UK£0.12 a share, following on from the last 12 months, when the company distributed a total of UK£0.17 per share to shareholders. Last year's total dividend payments show that UDG Healthcare has a trailing yield of 1.6% on the current share price of £8.1. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.
Check out our latest analysis for UDG Healthcare
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. UDG Healthcare paid out more than half (73%) of its earnings last year, which is a regular payout ratio for most companies. 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. Fortunately, it paid out only 45% of its free cash flow in the past year.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. UDG Healthcare's earnings per share have fallen at approximately 15% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past ten years, UDG Healthcare has increased its dividend at approximately 3.5% a year on average. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.