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 Synovus (NYS: SNV) 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 Synovus 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.
Synovus yields 2.1%, about in line with the S&P 500.
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.
Synovus doesn't have a payout ratio because it lost money over the past year.
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. The non-performing asset ratio is a good measure of credit quality. Below 1% is generally a good sign, while a ratio above 2% may be a bit worrying.
Let's see how Synovus stacks up next to some of its peers:
Source: S&P Capital IQ.
While each of these institutions has a reasonable Tier 1 capital ratio, Synovus', Zions', and TCF's non-performing assets are at elevated levels. However, Synovus, Zion, and Susquehanna have seen their non-performing ratios decline over the past couple of years.
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
Source: S&P Capital IQ. N/A = not applicable.
The financial crisis obviously hasn't been kind to these banks. All of their dividends have been crushed. Susquehanna's is back on the rise, while Synovus and Zions, which aren't yet back to profitability, still pay the $0.01 quarterly amount that many banks needed to cut back to in accordance with bailout terms.
The Foolish bottom line
Given its recent losses and elevated non-performing assets, Synovus clearly isn't a dividend dynamo today. But its reasonable capital levels and improving credit quality do indicate that a big turnaround could be in progress for this troubled bank. If you're looking for some great dividend stocks, check out "Secure Your Future With 11 Rock-Solid Dividend Stocks," a special report from The Motley Fool about some serious dividend dynamos. I invite you to grab a free copy to discover everything you need to know about the 11 generous dividend payers -- simply click here.
At the time thisarticle was published Ilan Moscovitzdoesn't own shares of any company mentioned.You can follow him on Twitter@TMFDada. 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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