It looks like CVS Health Corporation (NYSE:CVS) is about to go ex-dividend in the next four days. If you purchase the stock on or after the 22nd of April, you won't be eligible to receive this dividend, when it is paid on the 3rd of May.
CVS Health's next dividend payment will be US$0.50 per share, on the back of last year when the company paid a total of US$2.00 to shareholders. Last year's total dividend payments show that CVS Health has a trailing yield of 2.6% on the current share price of $75.88. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. That's why it's good to see CVS Health paying out a modest 36% of its earnings. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out 20% of its free cash flow as dividends last year, which is conservatively low.
It's positive to see that CVS Health's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at CVS Health, with earnings per share up 3.4% on average over the last five years. Recent growth has not been impressive. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, CVS Health has increased its dividend at approximately 19% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
To Sum It Up
From a dividend perspective, should investors buy or avoid CVS Health? Earnings per share growth has been growing somewhat, and CVS Health is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and CVS Health is halfway there. It's a promising combination that should mark this company worthy of closer attention.
While it's tempting to invest in CVS Health for the dividends alone, you should always be mindful of the risks involved. For example, we've found 1 warning sign for CVS Health that we recommend you consider before investing in the business.
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.
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. 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.
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