Fifth Third Bancorp (NASDAQ:FITB) has announced that it will be increasing its dividend on the 15th of October to US$0.30. The announced payment will take the dividend yield to 2.7%, which is in line with the average for the industry.
Fifth Third Bancorp's Earnings Easily Cover the Distributions
We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. Fifth Third Bancorp is quite easily earning enough to cover the dividend, however it is being let down by weak cash flows. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.
Over the next year, EPS is forecast to fall by 0.7%. Assuming the dividend continues along recent trends, we believe the payout ratio could be 37%, which we are pretty comfortable with and we think is feasible on an earnings basis.
Fifth Third Bancorp Has A Solid Track Record
The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. The first annual payment during the last 10 years was US$0.04 in 2011, and the most recent fiscal year payment was US$1.20. This works out to be a compound annual growth rate (CAGR) of approximately 41% a year over that time. Rapidly growing dividends for a long time is a very valuable feature for an income stock.
The Dividend Looks Likely To Grow
Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. It's encouraging to see Fifth Third Bancorp has been growing its earnings per share at 11% a year over the past five years. Fifth Third Bancorp definitely has the potential to grow its dividend in the future with earnings on an uptrend and a low payout ratio.
Our Thoughts On Fifth Third Bancorp's Dividend
In summary, while it's always good to see the dividend being raised, we don't think Fifth Third Bancorp's payments are rock solid. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We don't think Fifth Third Bancorp is a great stock to add to your portfolio if income is your focus.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Just as an example, we've come across 2 warning signs for Fifth Third Bancorp you should be aware of, and 1 of them doesn't sit too well with us. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.
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