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Discover Financial Services (NYSE:DFS) will increase its dividend on the 9th of June to US$0.60. This takes the annual payment to 1.9% of the current stock price, which is about average for the industry.
See our latest analysis for Discover Financial Services
Discover Financial Services' Earnings Easily Cover the Distributions
We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. However, prior to this announcement, Discover Financial Services' dividend was comfortably covered by both cash flow and earnings. 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 fall by 12.3%. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be 15%, which is comfortable for the company to continue in the future.
Discover Financial Services Has A Solid Track Record
The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. The first annual payment during the last 10 years was US$0.24 in 2012, and the most recent fiscal year payment was US$2.00. This means that it has been growing its distributions at 24% per annum over that time. We can see that payments have shown some very nice upward momentum without faltering, which provides some reassurance that future payments will also be reliable.
The Dividend Looks Likely To Grow
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Discover Financial Services has seen EPS rising for the last five years, at 25% per annum. Earnings per share is growing at a solid clip, and the payout ratio is low which we think is an ideal combination in a dividend stock as the company can quite easily raise the dividend in the future.
Discover Financial Services Looks Like A Great Dividend Stock
Overall, a dividend increase is always good, and we think that Discover Financial Services is a strong income stock thanks to its track record and growing earnings. The earnings easily cover the company's distributions, and the company is generating plenty of cash. 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 in all, this checks a lot of the boxes we look for when choosing an income stock.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Just as an example, we've come across 3 warning signs for Discover Financial Services you should be aware of, and 1 of them is significant. Is Discover Financial Services 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.