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Is G8 Education Ltd a good buy for its quarterly dividends?

Readers are likely to be more interested than ever in G8 Education Ltd’s (ASX: GEM) massive dividend and its future prospects given the recent rate cut by the Reserve Bank of Australia.

With the company expected to release its half-yearly report later this week, here are four critical things you should watch – that aren’t just revenues and profits – when the results are announced:

  • Occupancy

How much of the company’s capacity is used by paying customers. This had a peak of 85% at the end of the 2013 year (2014 results were not available). Improving occupancy rates would suggest management is able to effectively improve the operation of its acquired centres, which adds extra value to an acquisition. Falling occupancy would be bad news, obviously, but also because centre operation costs are fixed, expenses take up a dramatically larger percentage of total earnings when occupancy drops – which can result in a disproportionately rapid decline in profits.

Management doesn’t talk about occupancy a lot, which is unfortunate given that it is crucial to understanding G8 – investors might have to look a little further for this.

  • Cash flows (and dividends!)

G8 had positive cash flow from operations, even including dividend payments. In relation with occupancy above, investors want to look at ‘cash flows from operating activities’ and ‘dividends paid’ to check that the cash the company generates covers the dividend (and other things) comfortably. Last year the dividend cost 56% of G8’s operating cash flows – roughly on par with Coca-Cola Amatil Ltd (ASX: CCL), but unlike Insurance Australia Group Ltd (ASX: IAG) which paid more than it earned.

  • Net Tangible Assets (/liabilities)

G8 shares have been sold off heavily in the past over investor fears it would over-commit and go belly up. In combination with the occupancy and cash flow items above, investors should be sure to check the Net Tangible Assets (NTA) line in the upcoming report. As of December 2015, G8 securities had net tangible ‘assets’ of negative 93.6 cents per security – i.e., the company carries more debt than the face value of its assets.

  • Shares on issue

These have grown rapidly in recent years as G8 issued new shares to fund its acquisitions. There shouldn’t be much of an increase at this report because there haven’t been any capital raisings/ major acquisitions, but it’s still worth keeping an eye on in case further raisings occur. You’ll be better able to evaluate the potential dilution of your shareholding over time.

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Motley Fool contributor Sean O'Neill owns shares of Coca-Cola Amatil Limited and G8 Education Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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