State Street Corporation (NYSE:STT) will increase its dividend on the 12th of October to US$0.57. This makes the dividend yield 2.5%, which is above the industry average.
State Street's Payment Has Solid Earnings Coverage
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Based on the last payment, State Street was earning enough to cover the dividend, but free cash flows weren't positive. With the company not bringing in any cash, paying out to shareholders is bound to become difficult at some point.
Looking forward, earnings per share is forecast to rise by 20.4% over the next year. If the dividend continues on this path, the payout ratio could be 30% by next year, which we think can be pretty sustainable going forward.
State Street 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. Since 2011, the first annual payment was US$0.04, compared to the most recent full-year payment of US$2.28. This implies that the company grew its distributions at a yearly rate of about 50% over that duration. So, dividends have been growing pretty quickly, and even more impressively, they haven't experienced any notable falls during this period.
State Street Could Grow Its Dividend
Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. State Street has impressed us by growing EPS at 5.1% per year over the past five years. State Street definitely has the potential to grow its dividend in the future with earnings on an uptrend and a low payout ratio.
Our Thoughts On State Street's Dividend
In summary, while it's always good to see the dividend being raised, we don't think State Street's payments are rock solid. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. This company is not in the top tier of income providing stocks.
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. Taking the debate a bit further, we've identified 1 warning sign for State Street that investors need to be conscious of moving forward. We have also put together a list of global stocks with a solid dividend.
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