The board of VersaBank (TSE:VB) has announced that it will pay a dividend on the 31st of July, with investors receiving CA$0.025 per share. This means the annual payment will be 0.8% of the current stock price, which is lower than the industry average.
VersaBank's Payment Has Solid Earnings Coverage
If it is predictable over a long period, even low dividend yields can be attractive. Based on the last payment, VersaBank was earning enough to cover the dividend, but free cash flows weren't positive. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.
Looking forward, earnings per share could rise by 21.9% over the next year if the trend from the last few years continues. If the dividend continues along recent trends, we estimate the payout ratio will be 14%, which is in the range that makes us comfortable with the sustainability of the dividend.
VersaBank Doesn't Have A Long Payment History
Looking back, the dividend has been stable, but the company hasn't been paying a dividend for very long so we can't be confident that the dividend will remain stable through all economic environments. Since 2017, the first annual payment was CA$0.04, compared to the most recent full-year payment of CA$0.10. This works out to be a compound annual growth rate (CAGR) of approximately 26% a year over that time. It is always nice to see strong dividend growth, but with such a short payment history we wouldn't be inclined to rely on it until a longer track record can be developed.
The Dividend Looks Likely To Grow
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. It's encouraging to see VersaBank has been growing its earnings per share at 22% a year over the past five years. Earnings have been growing rapidly, and with a low payout ratio we think that the company could turn out to be a great dividend stock.
Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. This company is not in the top tier of income providing stocks.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Are management backing themselves to deliver performance? Check their shareholdings in VersaBank in our latest insider ownership analysis. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.
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