The board of Universal Insurance Holdings, Inc. (NYSE:UVE) has announced that it will pay a dividend of $0.16 per share on the 9th of August. This means the annual payment is 6.6% of the current stock price, which is above the average for the industry.

See our latest analysis for Universal Insurance Holdings

Universal Insurance Holdings Is Paying Out More Than It Is Earning

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before making this announcement, Universal Insurance Holdings' dividend was higher than its profits, but the free cash flows quite comfortably covered it. Generally, we think cash is more important than accounting measures of profit, so with the cash flows easily covering the dividend, we don't think there is much reason to worry.

The next 12 months is set to see EPS grow by 57.3%. If the dividend continues on its recent course, the payout ratio in 12 months could be 137%, which is a bit high and could start applying pressure to the balance sheet.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The dividend has gone from an annual total of $0.32 in 2012 to the most recent total annual payment of $0.77. This works out to be a compound annual growth rate (CAGR) of approximately 9.2% a year over that time. We have seen cuts in the past, so while the growth looks promising we would be a little bit cautious about its track record.

The Dividend Has Limited Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Over the past five years, it looks as though Universal Insurance Holdings' EPS has declined at around 34% a year. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this becomes a long term trend.

Universal Insurance Holdings' Dividend Doesn't Look Sustainable

Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. This company is not in the top tier of income providing stocks.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 3 warning signs for Universal Insurance Holdings that investors need to be conscious of moving forward. Is Universal Insurance Holdings not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.