Do These 3 Checks Before Buying Target Healthcare REIT PLC (LON:THRL) For Its Upcoming Dividend

Simply Wall St

Target Healthcare REIT PLC (LON:THRL) stock is about to trade ex-dividend in 2 days time. Investors can purchase shares before the 14th of November in order to be eligible for this dividend, which will be paid on the 29th of November.

Target Healthcare REIT's next dividend payment will be UK£0.02 per share, on the back of last year when the company paid a total of UK£0.07 to shareholders. Based on the last year's worth of payments, Target Healthcare REIT stock has a trailing yield of around 5.8% on the current share price of £1.15. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Target Healthcare REIT

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. Target Healthcare REIT paid out 130% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. For regulatory reasons, it's not uncommon to see REITs paying out around 100% of their earnings. However, we feel Target Healthcare REIT's payout ratio is still too high, and we wonder if the dividend is being funded by debt. 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. Over the past year it paid out 130% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Cash is slightly more important than profit from a dividend perspective, but given Target Healthcare REIT's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

LSE:THRL Historical Dividend Yield, November 10th 2019

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see Target Healthcare REIT has grown its earnings rapidly, up 60% a year for the past five years. Earnings per share have been growing rapidly, but the company is paying out a dividend that looks unsustainably high. Companies that pay out more than they earned while growing rapidly, can find themselves short of cash in a few years when growth slows.

We'd also point out that Target Healthcare REIT issued a meaningful number of new shares in the past year. It's hard to grow dividends per share when a company keeps creating new shares.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, six years ago, Target Healthcare REIT has lifted its dividend by approximately 0.5% a year on average. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.

Final Takeaway

From a dividend perspective, should investors buy or avoid Target Healthcare REIT? While it's nice to see earnings per share growing, we're curious about how Target Healthcare REIT intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Wondering what the future holds for Target Healthcare REIT? See what the two analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.