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CareTech Holdings PLC's (LON:CTH) dividend will be increasing to UK£0.095 on 4th of May. This takes the dividend yield from 2.5% to 2.5%, which shareholders will be pleased with.
CareTech Holdings' Earnings Easily Cover the Distributions
We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Based on the last payment, CareTech Holdings was quite comfortably earning enough to cover the dividend. This means that a large portion of its earnings are being retained to grow the business.
The next year is set to see EPS grow by 66.1%. If the dividend continues on this path, the payout ratio could be 33% by next year, which we think can be pretty sustainable going forward.
CareTech Holdings Has A Solid Track Record
The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. The first annual payment during the last 10 years was UK£0.055 in 2011, and the most recent fiscal year payment was UK£0.14. This means that it has been growing its distributions at 9.9% per annum over that time. Dividends have grown at a reasonable rate over this period, and without any major cuts in the payment over time, we think this is an attractive combination as it provides a nice boost to shareholder returns.
The Dividend's Growth Prospects Are Limited
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. However, initial appearances might be deceiving. Over the past five years, it looks as though CareTech Holdings' EPS has declined at around 4.9% a year. A modest decline in earnings isn't great, and it makes it quite unlikely that the dividend will grow in the future unless that trend can be reversed. 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 can turn into a longer term trend.
Overall, it's great to see the dividend being raised and that it is still in a sustainable range. While the payments look sustainable for now, earnings have been shrinking so the dividend could come under pressure in the future. This looks like it could be a good dividend stock going forward, but we would note that the payout ratio has been at higher levels in the past so it could happen again.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 1 warning sign for CareTech Holdings that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.
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