Northwest Bancshares, Inc. (NASDAQ:NWBI) stock is about to trade ex-dividend in four days. Ex-dividend means that investors that purchase the stock on or after the 4th of November will not receive this dividend, which will be paid on the 16th of November.
Northwest Bancshares's next dividend payment will be US$0.19 per share. Last year, in total, the company distributed US$0.76 to shareholders. Based on the last year's worth of payments, Northwest Bancshares has a trailing yield of 7.2% on the current stock price of $10.535. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Northwest Bancshares paid out 132% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance.
Generally, the higher a company's payout ratio, the more the dividend is at risk of being reduced.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's not ideal to see Northwest Bancshares's earnings per share have been shrinking at 3.4% a year over the previous five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Northwest Bancshares has delivered an average of 6.6% per year annual increase in its dividend, based on the past 10 years of dividend payments. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Northwest Bancshares is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
The Bottom Line
Is Northwest Bancshares an attractive dividend stock, or better left on the shelf? Not only are earnings per share shrinking, but Northwest Bancshares is paying out a disconcertingly high percentage of its profit as dividends. Generally we think dividend investors should avoid businesses in this situation, as high payout ratios and declining earnings can lead to the dividend being cut. Northwest Bancshares doesn't appear to have a lot going for it, and we're not inclined to take a risk on owning it for the dividend.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Northwest Bancshares. Case in point: We've spotted 3 warning signs for Northwest Bancshares you should be aware of.
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. 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.
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