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.

Synovus Financial Total Return Price Chart


Synovus Financial Total Return Price Chart by YCharts

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 Financial Dividend Chart


Synovus Financial Dividend Chart by YCharts

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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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.