Stock Analysis

Why First Business Financial Services, Inc. (NASDAQ:FBIZ) Is A Top Dividend Stock

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NasdaqGS:FBIZ
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Could First Business Financial Services, Inc. (NASDAQ:FBIZ) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. 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.

With First Business Financial Services yielding 3.3% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. It would not be a surprise to discover that many investors buy it for the dividends. The company also bought back stock equivalent to around 2.1% of market capitalisation this year. There are a few simple ways to reduce the risks of buying First Business Financial Services for its dividend, and we'll go through these below.

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historic-dividend
NasdaqGS:FBIZ Historic Dividend January 20th 2021

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. First Business Financial Services paid out 33% of its profit as dividends, over the trailing twelve month period. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.

Consider getting our latest analysis on First Business Financial Services' financial position here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of First Business Financial Services' dividend 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 10-year period, the first annual payment was US$0.1 in 2011, compared to US$0.7 last year. Dividends per share have grown at approximately 17% per year over this time.

It's rare to find a company that has grown its dividends rapidly over 10 years and not had any notable cuts, but First Business Financial Services has done it, which we really like.

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. First Business Financial Services' EPS are effectively flat over the past five years. Over the long term, steady earnings per share is a risk as the value of the dividends can be reduced by inflation. A payout ratio below 50% leaves ample room to reinvest in the business, and provides finanical flexibility. Earnings per share growth have grown slowly, which is not great, but if the retained earnings can be reinvested effectively, future growth may be stronger.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We're glad to see First Business Financial Services has a low payout ratio, as this suggests earnings are being reinvested in the business. Earnings per share have not been growing, but we respect a company that maintains a relatively stable dividend. First Business Financial Services has a credible record on several fronts, but falls slightly short of our standards for a dividend stock.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 5 analysts we track are forecasting for First Business Financial Services for free with public analyst estimates for the company.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

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What are the risks and opportunities for First Business Financial Services?

First Business Financial Services, Inc. operates as the bank holding company for First Business Bank that provides commercial banking products and services for small and medium-sized businesses, business owners, executives, professionals, and high net worth individuals.

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Rewards

  • Trading at 30.3% below our estimate of its fair value

  • Earnings grew by 15.8% over the past year

Risks

  • Earnings are forecast to decline by an average of 2.9% per year for the next 3 years

  • Significant insider selling over the past 3 months

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Share Price

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About NasdaqGS:FBIZ

First Business Financial Services

First Business Financial Services, Inc. operates as the bank holding company for First Business Bank that provides commercial banking products and services for small and medium-sized businesses, business owners, executives, professionals, and high net worth individuals.

Flawless balance sheet established dividend payer.