First Interstate BancSystem (NASDAQ:FIBK) Will Pay A Larger Dividend Than Last Year At $0.47

First Interstate BancSystem, Inc.'s (NASDAQ:FIBK) dividend will be increasing from last year's payment of the same period to $0.47 on 18th of November. This makes the dividend yield 4.1%, which is above the industry average.

Our analysis indicates that FIBK is potentially undervalued!

First Interstate BancSystem's Payment Expected To Have Solid Earnings Coverage

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained.

First Interstate BancSystem has established itself as a dividend paying company with over 10 years history of distributing earnings to shareholders. Past distributions do not necessarily guarantee future ones, but First Interstate BancSystem's payout ratio of 94% is a good sign as this means that earnings decently cover dividends.

Over the next 3 years, EPS is forecast to expand by 163.5%. Analyst estimates also show the future payout ratio being 42% in the same 3 years which brings it into quite a comfortable range.

First Interstate BancSystem Has A Solid Track Record

Even over a long history of paying dividends, the company's distributions have been remarkably stable. The annual payment during the last 10 years was $0.48 in 2012, and the most recent fiscal year payment was $1.88. This works out to be a compound annual growth rate (CAGR) of approximately 15% a year over that time. Rapidly growing dividends for a long time is a very valuable feature for an income stock.

First Interstate BancSystem May Find It Hard To Grow The Dividend

The company's investors will be pleased to have been receiving dividend income for some time. Unfortunately things aren't as good as they seem. First Interstate BancSystem has seen earnings per share falling at 4.4% per year over the last five years. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

We should note that First Interstate BancSystem has issued stock equal to 68% of shares outstanding. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. Although they have been consistent in the past, we think the payments are a little high to be sustained. We don't think First Interstate BancSystem is a great stock to add to your portfolio if income is your focus.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, First Interstate BancSystem has 5 warning signs (and 1 which can't be ignored) we think you should know about. Is First Interstate BancSystem not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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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.