Don't Buy MidWestOne Financial Group, Inc. (NASDAQ:MOFG) For Its Next Dividend Without Doing These Checks

MidWestOne Financial Group, Inc. (NASDAQ:MOFG) stock is about to trade ex-dividend in 4 days. If you purchase the stock on or after the 26th of February, you won't be eligible to receive this dividend, when it is paid on the 15th of March.

MidWestOne Financial Group's next dividend payment will be US$0.23 per share, on the back of last year when the company paid a total of US$0.90 to shareholders. Based on the last year's worth of payments, MidWestOne Financial Group has a trailing yield of 3.2% on the current stock price of $27.84. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for MidWestOne Financial Group

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. MidWestOne Financial Group paid out a disturbingly high 214% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business.

When a company pays out a dividend that is not well covered by profits, the dividend is generally seen as more vulnerable to being cut.

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

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. MidWestOne Financial Group's earnings per share have fallen at approximately 30% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, MidWestOne Financial Group has lifted its dividend by approximately 16% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. MidWestOne Financial Group is already paying out 214% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Is MidWestOne Financial Group an attractive dividend stock, or better left on the shelf? Earnings per share are in decline and MidWestOne Financial Group is paying out what we feel is an uncomfortably high percentage of its profit as dividends. Generally we think dividend investors should avoid businesses in this situation, as high payout ratios and declining earnings can lead to the dividend being cut. This is not an overtly appealing combination of characteristics, and we're just not that interested in this company's dividend.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with MidWestOne Financial Group. Our analysis shows 3 warning signs for MidWestOne Financial Group and you should be aware of these before buying any shares.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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This article by Simply Wall St is general in nature. 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.
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