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Is United Insurance Holdings Corp. (NASDAQ:UIHC) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
A 1.8% yield is nothing to get excited about, but investors probably think the long payment history suggests United Insurance Holdings has some staying power. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we’ll go through this below.
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Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. United Insurance Holdings paid out 737% of its profit as dividends, over the trailing twelve month period. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.
Consider getting our latest analysis on United Insurance Holdings’s financial position here.
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. For the purpose of this article, we only scrutinise the last decade of United Insurance Holdings’s dividend payments. The dividend has been cut by more than 20% on at least one occasion historically. During the past ten-year period, the first annual payment was US$0.20 in 2009, compared to US$0.24 last year. This works out to be a compound annual growth rate (CAGR) of approximately 1.8% a year over that time. United Insurance Holdings’s dividend payments have fluctuated, so it hasn’t grown 1.8% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.
Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company’s earnings are not consistent.
Dividend Growth Potential
With a relatively unstable dividend, it’s even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there’s a good chance of bigger dividends in future? Over the past five years, it looks as though United Insurance Holdings’s EPS have declined at around 52% a year. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.
To summarise, shareholders should always check that United Insurance Holdings’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. United Insurance Holdings is paying out a larger percentage of its profit than we’re comfortable with. Earnings per share are down, and United Insurance Holdings’s dividend has been cut at least once in the past, which is disappointing. Using these criteria, United Insurance Holdings looks suboptimal from a dividend investment perspective.
Given that earnings are not growing, the dividend does not look nearly so attractive. Very few businesses see earnings consistently shrink year after year in perpetuity though, and so it might be worth seeing what the 4 analysts we track are forecasting for the future.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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 email@example.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.