Although interest rates have been heading higher, the yield on everything from savings accounts to U.S. bonds is still historically low. That's led many people to look for steady income from dividend stocks.
Of course, that comes with risk because stocks are volatile. But that doesn't mean investors should avoid them altogether.
Healthcare Services Group (HCSG -0.37%) is a tiny company with a robust dividend operating in a steady, boring industry. A few charts can help investors decide if this housekeeping and food-service provider to the healthcare industry is worth the risk.
A history of giving more to shareholders
When Healthcare Services Group reported earnings this week, it announced its 76th consecutive quarterly dividend. Even more impressive, it was the 75th straight quarter it has raised the payout. It currently yields a hefty 5%.
A payout you can count on
But history is famously no guarantee of the future. To know whether they can count on the distribution to keep flowing, investors need to see that the company is generating plenty of money to cover it.
One way to measure that is the payout ratio, which is the percent of net income that's doled out in dividends. A lower ratio means the company has plenty of leeway to pay the dividend and room to raise it in the future.
Healthcare Services Group's payout ratio, averaged over a trailing-five-year period, shows it's sending about three-fourths of profits to shareholders in the form of a dividend. That's high but sustainable. It's indicative of a slow-growing business. For context, ExxonMobil and Chevron have payout ratios around 65%, while Philip Morris International's is 83%.
A lot of questions for management to answer
The company has seen its stock fall 64% from the high it reached at the end of 2017. There have been a number of issues, and foremost is the viability of Genesis Healthcare, its largest customer.
Genesis, a provider of long-term care, rehabilitation, and skilled nursing, began a restructuring early in the pandemic that led to a renegotiation of rates with Healthcare Services. The two have been fiddling with contract terms since 2018.
Offering lower prices affects both revenue and profit margins, and revenue has declined for three-straight years. However, the quarter just reported showed growth from the same period last year, a development that was cheered on Wall Street. Still, inflation cut into profits and the operating margin fell significantly.
That's not great news. The price of the stock has roughly mirrored operating margins since 2016. Shares have gone from trading between 40 and 50 times earnings before 2019 to about half that in the years since. But margins aren't the only overhang.
Where there's smoke
Late last summer, the company settled charges made by the Securities and Exchange Commission that it manipulated earnings between 2014 and 2017. Management neither admitted nor denied wrongdoing, but the CFO paid a $50,000 fine and changed roles as part of the agreement.
After the settlement, CEO Ted Wahl said the issue was behind them, but it does raise the prospect that another shoe could drop. Accounting issues aren't usually isolated events. Investors comfortable with that risk -- and willing to hold as inflation eats into profits -- might find the juicy yield worthy of a place in a diversified portfolio.