Why It Might Not Make Sense To Buy First National Financial Corporation (TSE:FN) For Its Upcoming Dividend

First National Financial Corporation (TSE:FN) stock is about to trade ex-dividend in 4 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase First National Financial's shares before the 28th of September to receive the dividend, which will be paid on the 16th of October.

The company's upcoming dividend is CA$0.20 a share, following on from the last 12 months, when the company distributed a total of CA$2.40 per share to shareholders. Looking at the last 12 months of distributions, First National Financial has a trailing yield of approximately 6.6% on its current stock price of CA$36.64. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether First National Financial can afford its dividend, and if the dividend could grow.

See our latest analysis for First National Financial

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. First National Financial is paying out an acceptable 70% of its profit, a common payout level among most companies.

When a company paid out less in dividends than it earned in profit, this generally suggests its dividend is affordable. The lower the % of its profit that it pays out, the greater the margin of safety for the dividend if the business enters a downturn.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're not enthused to see that First National Financial's earnings per share have remained effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. First National Financial has delivered an average of 6.3% per year annual increase in its dividend, based on the past 10 years of dividend payments.

Final Takeaway

Is First National Financial worth buying for its dividend? First National Financial's earnings per share have been essentially flat, and the company is paying out more than half of its earnings as dividends to shareholders. First National Financial doesn't appear to have a lot going for it, and we're not inclined to take a risk on owning it for the dividend.

With that being said, if you're still considering First National Financial as an investment, you'll find it beneficial to know what risks this stock is facing. Every company has risks, and we've spotted 1 warning sign for First National Financial you should know about.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.