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
Huntington Bancshares is a regional bank that, like peers Synovus Financial
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 lowered its dividend to $0.01 in 2009 and has only recently raised it to $0.04 per quarter.
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%.
Source: S&P Capital IQ.
There are some alternatives out there in the industry. FirstMerit
Another tool for better investing
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- Add Huntington Bancshares to My Watchlist.
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Follow Dan Dzombak on Twitter at @DanDzombak to check out his musings and see what articles he finds interesting. The Motley Fool owns shares of Huntington Bancshares, Fifth Third Bancorp, and FirstMerit. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.