Erie Indemnity's (NASDAQ:ERIE) Shareholders Will Receive A Bigger Dividend Than Last Year

The board of Erie Indemnity Company (NASDAQ:ERIE) has announced that it will be increasing its dividend by 7.2% on the 20th of January to $1.19, up from last year's comparable payment of $1.11. This takes the annual payment to 1.7% of the current stock price, which unfortunately is below what the industry is paying.

Check out the opportunities and risks within the US Insurance industry.

Erie Indemnity's Dividend Is Well Covered By Earnings

Even a low dividend yield can be attractive if it is sustained for years on end. Before making this announcement, Erie Indemnity was paying out quite a large proportion of both earnings and cash flow, with the dividend being 108% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.

Looking forward, earnings per share is forecast to rise by 18.9% over the next year. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 74% which brings it into quite a comfortable range.

Erie Indemnity Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. Since 2012, the annual payment back then was $2.21, compared to the most recent full-year payment of $4.44. This means that it has been growing its distributions at 7.2% per annum over that time. Companies like this can be very valuable over the long term, if the decent rate of growth can be maintained.

The Dividend Has Growth Potential

Investors could be attracted to the stock based on the quality of its payment history. Erie Indemnity has impressed us by growing EPS at 6.5% per year over the past five years. EPS has been growing at a reasonable rate, although with most of the profits being paid out to shareholders, growth prospects could be more limited in the future.

Erie Indemnity's Dividend Doesn't Look Sustainable

In summary, while it's always good to see the dividend being raised, we don't think Erie Indemnity's payments are rock solid. Although they have been consistent in the past, we think the payments are a little high to be sustained. We would be a touch cautious of relying on this stock primarily for the dividend income.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 2 warning signs for Erie Indemnity that investors should know about before committing capital to this stock. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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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.