Encompass Health Corporation (NYSE:EHC) Will Pay A US$0.28 Dividend In Four Days

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Encompass Health Corporation (NYSE:EHC) is about to trade ex-dividend in the next 4 days. If you purchase the stock on or after the 30th of September, you won't be eligible to receive this dividend, when it is paid on the 15th of October.

Encompass Health's upcoming dividend is US$0.28 a share, following on from the last 12 months, when the company distributed a total of US$1.12 per share to shareholders. Calculating the last year's worth of payments shows that Encompass Health has a trailing yield of 1.8% on the current share price of $61.3. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Encompass Health has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Encompass Health

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. Fortunately Encompass Health's payout ratio is modest, at just 39% of profit. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the last year it paid out 65% of its free cash flow as dividends, within the usual range for most companies.

It's positive to see that Encompass 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.

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at Encompass Health, with earnings per share up 3.9% on average over the last five years. Earnings growth has been slim and the company is paying out more than half of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Encompass Health has delivered 6.5% dividend growth per year on average over the past seven years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

The Bottom Line

Has Encompass Health got what it takes to maintain its dividend payments? Earnings per share growth has been modest, and it's interesting that Encompass Health is paying out less than half of its earnings and more than half its cash flow to shareholders in the form of dividends. To summarise, Encompass Health looks okay on this analysis, although it doesn't appear a stand-out opportunity.

On that note, you'll want to research what risks Encompass Health is facing. To that end, you should learn about the 2 warning signs we've spotted with Encompass Health (including 1 which doesn't sit too well with us).

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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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