First Merchants (NASDAQ:FRME) Is Increasing Its Dividend To $0.36

First Merchants Corporation (NASDAQ:FRME) will increase its dividend on the 20th of June to $0.36, which is 2.9% higher than last year's payment from the same period of $0.35. The payment will take the dividend yield to 3.7%, which is in line with the average for the industry.

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First Merchants' Payment Expected To Have Solid Earnings Coverage

We aren't too impressed by dividend yields unless they can be sustained over time.

First Merchants has a long history of paying out dividends, with its current track record at a minimum of 10 years. Taking data from its last earnings report, calculating for the company's payout ratio shows 39%, which means that First Merchants would be able to pay its last dividend without pressure on the balance sheet.

Looking forward, earnings per share is forecast to rise by 6.7% over the next year. If the dividend continues along recent trends, we estimate the future payout ratio will be 42%, which is in the range that makes us comfortable with the sustainability of the dividend.

Check out our latest analysis for First Merchants

First Merchants 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. Since 2015, the annual payment back then was $0.32, compared to the most recent full-year payment of $1.40. This works out to be a compound annual growth rate (CAGR) of approximately 16% a year over that time. So, dividends have been growing pretty quickly, and even more impressively, they haven't experienced any notable falls during this period.

The Dividend's Growth Prospects Are Limited

Investors could be attracted to the stock based on the quality of its payment history. However, First Merchants has only grown its earnings per share at 3.2% per annum over the past five years. If First Merchants is struggling to find viable investments, it always has the option to increase its payout ratio to pay more to shareholders.

We Really Like First Merchants' Dividend

Overall, we think this could be an attractive income stock, and it is only getting better by paying a higher dividend this year. The company is easily earning enough to cover its dividend payments and it is great to see that these earnings are being translated into cash flow. All in all, this checks a lot of the boxes we look for when choosing an income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Earnings growth generally bodes well for the future value of company dividend payments. See if the 6 First Merchants analysts we track are forecasting continued growth with our free report on analyst estimates for the company. Is First Merchants 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.