Dividend investing is a tried-and-true strategy for generating strong, steady returns in economies both good and bad. But as corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.
Let's examine how PNC (NYS: PNC) stacks up. In this series, we consider four critical factors investors should examine in every dividend stock. We'll then tie it all together to look at whether PNC is a dividend dynamo or a disaster in the making.
First and foremost, dividend investors like a large forward yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.
PNC yields a moderate 2.3%, a bit higher than the S&P 500's 2.1% and fairly impressive for a bank these days.
2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company paid out in dividends last year to the earnings it generated. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford, even when its dividend yield doesn't seem particularly high.
PNC has a modest payout ratio of just 16%.
3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The Tier 1 capital ratio is a commonly used leverage metric for banks that compares equity and reserves with total risk-weighted assets. In a non-financial crisis, a ratio above 13% is generally considered to be relatively conservative.
Let's examine how PNC stacks up next to its peers:
Tier 1 Capital Ratio
BB&T (NYS: BBT)
Zions Bancorp (NAS: ZION)
SunTrust (NYS: STI)
Sources: S&P Capital IQ.
Regional banks have recovered considerably since the crisis. Each of these banks has a decent capital level. It would be nice if SunTrust's were a little higher, but considering its improving credit quality, I'm not terribly concerned.
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
Over the past five years, PNC has seen its earnings per share shrink at an annual rate of 6%, while its dividend has shrunk at a rate of 16%. In the context of the banking system, that's not all that bad, actually. BB&T and SunTrust saw their earnings per share fall even further over that time frame, while Zion didn't earn a profit over the past 12 months -- and many banks are doing far worse than these in this reasonably flat yield curve environment.
Credit quality has been improving enough for PNC to grow earnings per share by 4% over the past year.
The Foolish bottom line
PNC exhibits a reasonable dividend bill of health. It has a moderate yield and a modest payout ratio. Dividend investors will want to keep an eye on the bank's revenue and earnings growth over the coming years to ensure that it's able to grow its dividends over the long term. To stay up to speed on PNC's progress, or that of any other stock, add it to your stock watchlist. If you don't have one yet, you can create a free, personalized watchlist of your favorite stocks by clicking here.
At the time thisarticle was published Ilan Moscovitzdoesn't own shares of any company mentioned.You can follow him on Twitter@TMFDada. The Motley Fool owns shares of 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.
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