The board of Webster Financial Corporation (NYSE:WBS) has announced that it will pay a dividend of US$0.40 per share on the 27th of May. This payment means that the dividend yield will be 3.2%, which is around the industry average.
Webster Financial's Earnings Easily Cover the Distributions
We aren't too impressed by dividend yields unless they can be sustained over time. The last dividend was quite easily covered by Webster Financial's earnings. This indicates that a lot of the earnings are being reinvested into the business, with the aim of fueling growth.
Looking forward, earnings per share is forecast to rise by 65.7% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could be 70% by next year, which is in a pretty sustainable range.
Webster Financial 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. The first annual payment during the last 10 years was US$0.20 in 2012, and the most recent fiscal year payment was US$1.60. This means that it has been growing its distributions at 23% per annum over that time. We can see that payments have shown some very nice upward momentum without faltering, which provides some reassurance that future payments will also be reliable.
Dividend Growth Is Doubtful
Investors could be attracted to the stock based on the quality of its payment history. Let's not jump to conclusions as things might not be as good as they appear on the surface. Over the past five years, it looks as though Webster Financial's EPS has declined at around 7.9% a year. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. Earnings are predicted to grow over the next year, but we would remain cautious until a track record of earnings growth is established.
We'd also point out that Webster Financial has issued stock equal to 97% 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.
Overall, we think Webster Financial is a solid choice as a dividend stock, even though the dividend wasn't raised this year. While the payments look sustainable for now, earnings have been shrinking so the dividend could come under pressure in the future. The payment isn't stellar, but it could make a decent addition to a dividend portfolio.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Webster Financial has 3 warning signs (and 1 which is a bit unpleasant) we think you should know about. Is Webster Financial 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.
Webster Financial Corporation operates as the bank holding company for Webster Bank, National Association that provides a range of banking, investment, and financial services to individuals, families, and businesses in the United States.
Flawless balance sheet established dividend payer.