First American Financial (NYSE:FAF) Is Increasing Its Dividend To $0.53

First American Financial Corporation (NYSE:FAF) will increase its dividend on the 15th of September to $0.53, which is 1.9% higher than last year's payment from the same period of $0.52. This will take the annual payment to 3.5% of the stock price, which is above what most companies in the industry pay.

View our latest analysis for First American Financial

First American Financial's Payment Has Solid Earnings Coverage

A big dividend yield for a few years doesn't mean much if it can't be sustained. The last payment made up 90% of earnings, but cash flows were much higher. This leaves plenty of cash for reinvestment into the business.

Looking forward, earnings per share is forecast to rise by 46.8% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 69%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

First American 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 annual payment during the last 10 years was $0.48 in 2013, and the most recent fiscal year payment was $2.08. This means that it has been growing its distributions at 16% per annum 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 Has Limited Growth Potential

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. However, initial appearances might be deceiving. Earnings per share has been sinking by 11% over the last five years. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough. 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 becomes a long term trend.

Our Thoughts On First American Financial's Dividend

Overall, we always like to see the dividend being raised, but we don't think First American Financial will make a great income stock. The company is generating plenty of cash, but we still think the dividend is a bit high for comfort. We would probably look elsewhere for an income investment.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 2 warning signs for First American Financial that investors need to be conscious of moving forward. 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.