The board of Regis Healthcare Limited (ASX:REG) has announced that it will pay a dividend of A$0.0664 per share on the 25th of September. However, the dividend yield of 2.5% still remains in a typical range for the industry.

View our latest analysis for Regis Healthcare

Regis Healthcare's Earnings Easily Cover The Distributions

We aren't too impressed by dividend yields unless they can be sustained over time. While Regis Healthcare is not profitable, it is paying out less than 75% of its free cash flow, which means that there is plenty left over for reinvestment into the business. This gives us some comfort about the level of the dividend payments.

The next 12 months could see EPS growing very rapidly. If the dividend continues along recent trends, we believe we could see the payout ratio reaching 92%, which is definitely on the higher side, but still sustainable.

Regis Healthcare's Dividend Has Lacked Consistency

It's comforting to see that Regis Healthcare has been paying a dividend for a number of years now, however it has been cut at least once in that time. This makes us cautious about the consistency of the dividend over a full economic cycle. Since 2015, the dividend has gone from A$0.176 total annually to A$0.129. Doing the maths, this is a decline of about 3.4% per year. A company that decreases its dividend over time generally isn't what we are looking for.

Dividend Growth Potential Is Shaky

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Regis Healthcare's EPS has fallen by approximately 61% per year during the past five years. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in 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.

The Dividend Could Prove To Be Unreliable

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. 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. We would probably look elsewhere for an income investment.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Case in point: We've spotted 2 warning signs for Regis Healthcare (of which 1 is potentially serious!) you should know about. Is Regis Healthcare not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.