The board of Valley National Bancorp (NASDAQ:VLY) has announced that it will pay a dividend on the 1st of July, with investors receiving US$0.11 per share. The dividend yield will be 3.8% based on this payment which is still above the industry average.
Valley National Bancorp's Payment Has Solid Earnings Coverage
If the payments aren't sustainable, a high yield for a few years won't matter that much. Before making this announcement, Valley National Bancorp was easily earning enough to cover the dividend. As a result, a large proportion of what it earned was being reinvested back into the business.
Over the next year, EPS is forecast to expand by 1.6%. If the dividend continues along recent trends, we estimate the payout ratio will be 47%, which is in the range that makes us comfortable with the sustainability of the dividend.
Although the company has a long dividend history, it has been cut at least once in the last 10 years. The dividend has gone from US$0.66 in 2012 to the most recent annual payment of US$0.44. Doing the maths, this is a decline of about 3.9% per year. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.
The Dividend Has Growth Potential
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Valley National Bancorp has impressed us by growing EPS at 6.6% per year over the past five years. Valley National Bancorp definitely has the potential to grow its dividend in the future with earnings on an uptrend and a low payout ratio.
The company has also been raising capital by issuing stock equal to 25% of shares outstanding in the last 12 months. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.
Overall, a consistent dividend is a good thing, and we think that Valley National Bancorp has the ability to continue this into the future. The payout ratio looks good, but unfortunately the company's dividend track record isn't stellar. The payment isn't stellar, but it could make a decent addition to a dividend portfolio.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 2 warning signs for Valley National Bancorp that investors should know about before committing capital to this stock. Is Valley National Bancorp not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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