Huntington Bancshares Incorporated's (NASDAQ:HBAN) investors are due to receive a payment of US$0.15 per share on 1st of July. The dividend yield will be 4.5% based on this payment which is still above the industry average.
Huntington Bancshares' Earnings Easily Cover the Distributions
We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Before this announcement, Huntington Bancshares was paying out 77% of earnings, but a comparatively small 33% of free cash flows. This leaves plenty of cash for reinvestment into the business.
The next year is set to see EPS grow by 80.2%. If the dividend continues along recent trends, we estimate the payout ratio will be 52%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.
Huntington Bancshares Has A Solid Track Record
Even over a long history of paying dividends, the company's distributions have been remarkably stable. Since 2012, the dividend has gone from US$0.16 to US$0.62. This works out to be a compound annual growth rate (CAGR) of approximately 15% a year 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's Growth Prospects Are Limited
Investors could be attracted to the stock based on the quality of its payment history. Although it's important to note that Huntington Bancshares' earnings per share has basically not grown from where it was five years ago, which could erode the purchasing power of the dividend over time. There are exceptions, but limited earnings growth and a high payout ratio can signal that a company has reached maturity. When the rate of return on reinvestment opportunities falls below a certain minimum level, companies often elect to pay a larger dividend instead. This is why many mature companies often have larger dividend yields.
We'd also point out that Huntington Bancshares has issued stock equal to 41% of shares outstanding. Regularly doing this can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Huntington Bancshares' payments, as there could be some issues with sustaining them into the future. The company has been bring in plenty of cash to cover the dividend, but we don't necessarily think that makes it a great dividend stock. We would probably look elsewhere for an income investment.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. As an example, we've identified 3 warning signs for Huntington Bancshares that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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