The board of Provident Financial Services, Inc. (NYSE:PFS) has announced that it will pay a dividend of US$0.23 per share on the 27th of August. Based on this payment, the dividend yield on the company's stock will be 4.3%, which is an attractive boost to shareholder returns.
Provident Financial Services' Payment Has Solid Earnings Coverage
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Prior to this announcement, Provident Financial Services' dividend was comfortably covered by both cash flow and earnings. This indicates that a lot of the earnings are being reinvested into the business, with the aim of fueling growth.
EPS is set to fall by 6.7% over the next 12 months. Assuming the dividend continues along recent trends, we believe the payout ratio could be 50%, which we are pretty comfortable with and we think is feasible on an earnings basis.
Provident Financial Services Has A Solid Track Record
The company has an extended history of paying stable dividends. Since 2011, the first annual payment was US$0.44, compared to the most recent full-year payment of US$0.92. This implies that the company grew its distributions at a yearly rate of about 7.7% over that duration. Dividends have grown at a reasonable rate over this period, and without any major cuts in the payment over time, we think this is an attractive combination as it provides a nice boost to shareholder returns.
Provident Financial Services Could Grow Its Dividend
The company's investors will be pleased to have been receiving dividend income for some time. We are encouraged to see that Provident Financial Services has grown earnings per share at 9.8% per year over the past five years. Since earnings per share is growing at an acceptable rate, and the payout policy is balanced, we think the company is positioning itself well to grow earnings and dividends in the future.
We'd also point out that Provident Financial Services has issued stock equal to 19% of shares outstanding. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.
Provident Financial Services Looks Like A Great Dividend Stock
Overall, we think that this is a great income investment, and we think that maintaining the dividend this year may have been a conservative choice. The earnings easily cover the company's distributions, and the company is generating plenty of cash. If earnings do fall over the next 12 months, the dividend could be buffeted a little bit, but we don't think it should cause too much of a problem in the long term. All in all, this checks a lot of the boxes we look for when choosing an income stock.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 3 warning signs for Provident Financial Services (of which 1 is a bit unpleasant!) you should know about. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.
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