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The board of Bread Financial Holdings, Inc. (NYSE:BFH) has announced that it will pay a dividend on the 17th of June, with investors receiving US$0.21 per share. The dividend yield will be 35% based on this payment which is still above the industry average.
Bread Financial Holdings Doesn't Earn Enough To Cover Its Payments
We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. However, prior to this announcement, Bread Financial Holdings' dividend was comfortably covered by both cash flow and earnings. This means that most of what the business earns is being used to help it grow.
Over the next year, EPS is forecast to fall by 32.9%. Assuming the dividend continues along recent trends, we believe the payout ratio could reach 171%, which could put the dividend under pressure if earnings don't start to improve.
Bread Financial Holdings' Dividend Has Lacked Consistency
Bread Financial Holdings has been paying dividends for a while, but the track record isn't stellar. This suggests that the dividend might not be the most reliable. The dividend has gone from US$2.08 in 2016 to the most recent annual payment of US$0.84. The dividend has fallen 60% over that period. A company that decreases its dividend over time generally isn't what we are looking for.
The Dividend Looks Likely To Grow
Given that the track record hasn't been stellar, we really want to see earnings per share growing over time. We are encouraged to see that Bread Financial Holdings has grown earnings per share at 17% per year over the past five years. Growth in EPS bodes well for the dividend, as does the low payout ratio that the company is currently reporting.
Bread Financial Holdings Looks Like A Great Dividend Stock
Overall, we like to see the dividend staying consistent, and we think Bread Financial Holdings might even raise payments in the future. The distributions are easily covered by earnings, and there is plenty of cash being generated as well. We should point out that the earnings are expected to fall over the next 12 months, which won't be a problem if this doesn't become a trend, but could cause some turbulence in the next year. All of these factors considered, we think this has solid potential as a dividend stock.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Case in point: We've spotted 4 warning signs for Bread Financial Holdings (of which 2 are a bit concerning!) you should know about. Is Bread Financial Holdings not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.