Not all dividends are created equal. Here, we'll do a top-to-bottom analysis of a given company to understand the quality of its dividend and how that's changed over the past five years.
The company we're looking at today is Synovus Financial (NYS: SNV) , which yields 2.7%.
Synovus is a regional bank that, like peersHuntington Bancshares (NAS: HBAN) and Regions Financial (NYS: RF) , took TARP money from the government after getting hit hard by the mortgage crisis. While some regional banks like Hudson City Bancorp (NAS: HCBK) remained profitable even through the financial crisis, until this most recent quarter Synovus had not reported a profit since the second quarter of 2008.
To evaluate the quality of a dividend, the first thing to consider is whether the company has paid a dividend consistently over the past five years, and if so, how much it has grown.
Synovus cut its dividend to a mere $0.01 per quarter during the financial crisis, and that's where it remains today.
The tools we use to evaluate a dividend's safety are:
The EPS payout ratio, or dividends per share divided by earnings per share. The EPS payout ratio measures the percentage of earnings that go toward paying the dividend. A ratio greater than 80% is worrisome.
The FCF payout ratio, or dividends per share divided by free cash flow per share. Earnings alone don't always paint a complete picture of a business's health. The FCF payout ratio measures the percent of free cash flow devoted toward paying the dividend. Again, a ratio greater than 80% could be a red flag.
Source: S&P Capital IQ.
Synovus has been unprofitable on an earnings basis since 2008, giving it a negative P/E payout ratio. During that time, though, it has maintained positive free cash flow and a low free cash flow payout ratio.
Source: S&P Capital IQ.
Synovus' low yield makes some alternatives out there in the industry look more attractive. M&T Bank (NYS: MTB) has a 1 percentage point higher yield than Synovus at 3.7% but a payout ratio five times higher at 21%. PNC Bank (NYS: PNC) has a yield slightly lower than Synovus at 2.5% but also a higher payout ratio. KeyCorp (NYS: KEY) rounds out the group with a 1.6% yield and a low payout ratio.
Another tool for better investing
Most investors don't keep tabs on their companies. That's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. We can help you keep tabs on your companies with My Watchlist, our free, personalized stock-tracking service.
Add Synovus Financial to My Watchlist.
At the time thisarticle was published FollowDan Dzombakon Twitter at@DanDzombakto check out his musings and see what articles he finds interesting.The Motley Fool owns shares of Huntington Bancshares, KeyCorp, and PNC Financial Services Group. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.