The board of Provident Financial Holdings, Inc. (NASDAQ:PROV) has announced that it will pay a dividend of US$0.14 per share on the 2nd of September. This means the dividend yield will be fairly typical at 3.2%.
Provident Financial Holdings' Payment Has Solid Earnings Coverage
Unless the payments are sustainable, the dividend yield doesn't mean too much. Before this announcement, Provident Financial Holdings was paying out 72% of earnings, but a comparatively small 33% of free cash flows. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.
The next year is set to see EPS grow by 27.6%. If the dividend continues along recent trends, we estimate the payout ratio will be 59%, which is in the range that makes us comfortable with the sustainability of the dividend.
Provident Financial Holdings Has A Solid Track Record
The company has an extended history of paying stable dividends. Since 2011, the dividend has gone from US$0.04 to US$0.56. This works out to be a compound annual growth rate (CAGR) of approximately 30% a year over that time. It is good to see that there has been strong dividend growth, and that there haven't been any cuts for a long time.
The Dividend's Growth Prospects Are Limited
Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. However, initial appearances might be deceiving. Provident Financial Holdings has seen earnings per share falling at 2.2% per year over the last five years. A modest decline in earnings isn't great, and it makes it quite unlikely that the dividend will grow in the future unless that trend can be reversed. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this can turn into a longer term trend.
Our Thoughts On Provident Financial Holdings' Dividend
Overall, we think Provident Financial Holdings is a solid choice as a dividend stock, even though the dividend wasn't raised this year. The earnings coverage is acceptable for now, but with earnings on the decline we would definitely keep an eye on the payout ratio. The dividend looks okay, but there have been some issues in the past, so we would be a little bit cautious.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. Without at least some growth in earnings per share over time, the dividend will eventually come under pressure either from competition or inflation. Businesses can change though, and we think it would make sense to see what analysts are forecasting for the company. We have also put together a list of global stocks with a solid dividend.
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