First American Financial Corporation (NYSE:FAF) stock is about to trade ex-dividend in 4 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Meaning, you will need to purchase First American Financial’s shares before the 7th of December to receive the dividend, which will be paid on the 15th of December.
The company’s upcoming dividend is US$0.53 a share, following on from the last 12 months, when the company distributed a total of US$2.12 per share to shareholders. Based on the last year’s worth of payments, First American Financial has a trailing yield of 3.5% on the current stock price of $60.42. If you buy this business for its dividend, you should have an idea of whether First American Financial’s dividend is reliable and sustainable. That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.
View our latest analysis for First American Financial
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. First American Financial paid out 92% of its earnings, which is more than we’re comfortable with, unless there are mitigating circumstances.
Generally, the higher a company’s payout ratio, the more the dividend is at risk of being reduced.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we’re concerned to see First American Financial’s earnings per share have dropped 9.5% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, First American Financial has increased its dividend at approximately 16% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. First American Financial is already paying out a high percentage of its income, so without earnings growth, we’re doubtful of whether this dividend will grow much in the future.
Final Takeaway
Is First American Financial an attractive dividend stock, or better left on the shelf? Not only are earnings per share shrinking, but First American Financial is paying out a disconcertingly high percentage of its profit as dividends. It’s not that we hate the business, but we feel that these characeristics are not desirable for investors seeking a reliable dividend stock to own for the long term. All things considered, we’re not optimistic about its dividend prospects, and would be inclined to leave it on the shelf for now.
Although, if you’re still interested in First American Financial and want to know more, you’ll find it very useful to know what risks this stock faces. For example, we’ve found 2 warning signs for First American Financial that we recommend you consider before investing in the business.
If you’re in the market for strong dividend payers, we recommend checking 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.
