First Merchants Corporation (NASDAQ:FRME) has announced that it will be increasing its periodic dividend on the 20th of June to $0.36, which will be 2.9% higher than last year’s comparable payment amount of $0.35. The payment will take the dividend yield to 3.7%, which is in line with the average for the industry.
While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible.
First Merchants has a long history of paying out dividends, with its current track record at a minimum of 10 years. Past distributions do not necessarily guarantee future ones, but First Merchants’ payout ratio of 39% is a good sign as this means that earnings decently cover dividends.
The next year is set to see EPS grow by 6.7%. Assuming the dividend continues along recent trends, we think the future payout ratio could be 42% by next year, which is in a pretty sustainable range.
View our latest analysis for First Merchants
Even over a long history of paying dividends, the company’s distributions have been remarkably stable. The annual payment during the last 10 years was $0.32 in 2015, and the most recent fiscal year payment was $1.40. This works out to be a compound annual growth rate (CAGR) of approximately 16% 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.
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Earnings has been rising at 3.2% per annum over the last five years, which admittedly is a bit slow. While EPS growth is quite low, First Merchants has the option to increase the payout ratio to return more cash to shareholders.
Overall, we think this could be an attractive income stock, and it is only getting better by paying a higher dividend this year. Distributions are quite easily covered by earnings, which are also being converted to cash flows. All in all, this checks a lot of the boxes we look for when choosing an income stock.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. Earnings growth generally bodes well for the future value of company dividend payments. See if the 6 First Merchants analysts we track are forecasting continued growth with our free report on analyst estimates for the company. If you are a dividend investor, you might also want to look at our curated list of high yield 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.
