Why It Might Not Make Sense To Buy National Bankshares, Inc. (NASDAQ:NKSH) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see National Bankshares, Inc. (NASDAQ:NKSH) is about to trade ex-dividend in the next four days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Therefore, if you purchase National Bankshares' shares on or after the 25th of November, you won't be eligible to receive the dividend, when it is paid on the 2nd of December.

The company's next dividend payment will be US$0.78 per share, and in the last 12 months, the company paid a total of US$1.51 per share. Looking at the last 12 months of distributions, National Bankshares has a trailing yield of approximately 4.8% on its current stock price of US$31.36. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether National Bankshares can afford its dividend, and if the dividend could grow.

View our latest analysis for National Bankshares

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Last year, National Bankshares paid out 105% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business.

Generally, the higher a company's payout ratio, the more the dividend is at risk of being reduced.

Click here to see how much of its profit National Bankshares paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. National Bankshares's earnings per share have fallen at approximately 10.0% 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, National Bankshares has lifted its dividend by approximately 2.9% 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. National Bankshares is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

To Sum It Up

From a dividend perspective, should investors buy or avoid National Bankshares? Not only are earnings per share shrinking, but National Bankshares is paying out a disconcertingly 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.

With that being said, if you're still considering National Bankshares as an investment, you'll find it beneficial to know what risks this stock is facing. Our analysis shows 4 warning signs for National Bankshares and you should be aware of them before buying any shares.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.