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 (NYSE: SNV ) , which yields 2.7%.
Industry
Synovus is a regional bank that, like peers Huntington Bancshares (Nasdaq: HBAN ) and Regions Financial (NYSE: RF ) , took TARP money from the government after getting hit hard by the mortgage crisis. While some regional banks like Hudson City Bancorp (Nasdaq: 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.
Dividend
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.
Sustainability
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.
Alternatives
Source: S&P Capital IQ.
Synovus' low yield makes some alternatives out there in the industry look more attractive. M&T Bank (NYSE: MTB ) has a 1 percentage point higher yield than Synovus at 3.7% but a payout ratio five times higher at 21%. PNC Bank (NYSE: PNC ) has a yield slightly lower than Synovus at 2.5% but also a higher payout ratio. KeyCorp (NYSE: KEY ) rounds out the group with a 1.6% yield and a low payout ratio.
Another tool for better investing
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