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 Huntington Bancshares (Nasdaq: HBAN) which yields 3.1%.

Industry
Huntington Bancshares is a regional bank that, like peers Synovus Financial (NYSE: SNV) 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.

Huntington Bancshares Total Return Price Chart

Huntington Bancshares 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 has it grown.

Huntington Bancshares Dividend Chart

Huntington Bancshares Dividend Chart by YCharts.

Huntington Bancshares lowered its dividend to $0.01 in 2009 and has only recently raised it to $0.04 per quarter.

Sustainability
The tools we use to evaluate the safety of a dividend 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.

Huntington Bancshares' payout ratios have been all over the place as the company went through the financial crisis. However, the firm's free cash flow and earnings payout ratios have recently been low, below 20%.

Alternatives

Source: S&P Capital IQ.

There are some alternatives out there in the industry. FirstMerit (Nasdaq: FMER) has a high yield of 4.4% but also a relatively high payout ratio, nearing 60%. Both BB&T (NYSE: BBT) and Fifth Third (Nasdaq: FITB) have yields of 2.7% and small payout ratios of 9.4% and 3.8%, respectively.

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.