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 BB&T (NYSE: BBT ) stacks up in four critical areas to determine whether it's a dividend dynamo or a disaster in the making.
1. Yield
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.
BB&T yields 2.5%, somewhat higher than the S&P's 1.8%.
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.
BB&T's payout ratio is 52%.
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.
BB&T's Tier 1 capital ratio is a moderate 12.3%.
4. Growth
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
Let's examine how BB&T stacks up next to its peers:
|
Company
|
5-Year Earnings-per-Share Growth
|
5-Year Dividend Growth
|
|
BB&T
|
(16%)
|
(17%)
|
|
PNC (NYSE: PNC )
|
5%
|
(21%)
|
|
SunTrust Banks (NYSE: STI )
|
(32%)
|
(56%)
|
|
Fifth Third Bancorp (Nasdaq: FITB )
|
(17%)
|
(38%)
|
Source: Capital IQ, a division of Standard & Poor's.
Obviously, the financial crisis wasn't very kind to regional banks like BB&T, though the company has bounced back somewhat, with a 26% earnings-per-share gain over the past year.
The Foolish bottom line
BB&T exhibits a fairly reasonable dividend bill of health. It has a moderate payout ratio, a reasonable Tier 1 capital ratio, and the earnings slide appears to have subsided. Yield-hungry investors will want to keep an eye on that earnings growth to see if and when BB&T is able to raise its dividend further.
To stay up-to-speed on the top news and analysis on BB&T, or any other stock, simply click here to add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.
RSS Headlines
Fool UK