Today we’ll take a closer look at FirstCash, Inc. (NASDAQ:FCFS) from a dividend investor’s perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. If you are hoping to live on your dividends, it’s important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you’ll find our analysis useful.
So you might want to consider getting our latest analysis on FirstCash’s financial health here.
Investors might not know much about FirstCash’s dividend prospects, even though it has been paying dividends for the last four years and offers a 1.1% yield. While the yield may not look too great, the relatively long payment history is interesting. The company also returned around 3.0% of its market capitalisation to shareholders in the form of stock buybacks over the past year. Some simple research can reduce the risk of buying FirstCash for its dividend – read on to learn more.
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable – hardly an ideal situation. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 27% of FirstCash’s profits were paid out as dividends in the last 12 months. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Plus, there is room to increase the payout ratio over time.
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. Looking at the data, we can see that FirstCash has been paying a dividend for the past four years. The company has been paying a stable dividend for a few years now, but we’d like to see more evidence of consistency over a longer period. During the past four-year period, the first annual payment was US$0.50 in 2015, compared to US$1.00 last year. This works out to be a compound annual growth rate (CAGR) of approximately 19% a year over that time.
We’re not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Earnings have grown at around 4.4% a year for the past five years, which is better than seeing them shrink! A payout ratio below 50% leaves ample room to reinvest in the business, and provides finanical flexibility. However, earnings per share are unfortunately not growing much. Might this suggest that the company should pay a higher dividend instead?
To summarise, shareholders should always check that FirstCash’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that FirstCash has a low and conservative payout ratio. Unfortunately, earnings growth has also been mediocre, and we think it has not been paying dividends long enough to demonstrate resilience across economic cycles. In summary, we’re unenthused by FirstCash as a dividend stock. It’s not that we think it is a bad company; it simply falls short of our criteria in some key areas.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 6 FirstCash analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
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 firstname.lastname@example.org. 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.