Dividend paying stocks like The First Bancorp, Inc. (NASDAQ:FNLC) tend to be popular with investors, and for good reason – some research suggests a significant amount of all stock market returns come from reinvested dividends. 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.
In this case, First Bancorp likely looks attractive to investors, given its 4.7% dividend yield and a payment history of over ten years. We’d guess that plenty of investors have purchased it for the income. Some simple analysis can reduce the risk of holding First Bancorp for its dividend, and we’ll focus on the most important aspects below.
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Payout ratios
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. In the last year, First Bancorp paid out 51% of its profit as dividends. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business – which could be good or bad.
Dividend Volatility
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well – nasty. First Bancorp has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been stable over the past 10 years, which is great. We think this could suggest some resilience to the business and its dividends. During the past ten-year period, the first annual payment was US$0.78 in 2009, compared to US$1.20 last year. This works out to be a compound annual growth rate (CAGR) of approximately 4.4% a year over that time.
While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is unappealing.
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. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see First Bancorp has grown its earnings per share at 14% per annum over the past five years. First Bancorp’s earnings per share have grown rapidly in recent years, although more than half of its profits are being paid out as dividends, which makes us wonder if the company has a limited number of reinvestment opportunities in its business.
Conclusion
Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. First, we think First Bancorp has an acceptable payout ratio. Second, it has a limited history of earnings per share growth, but at least the dividends have been relatively stable. First Bancorp has a credible record on several fronts, but falls slightly short of our standards for a dividend stock.
You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in First Bancorp stock.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding 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 editorial-team@simplywallst.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.