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Financial Institutions, Inc. (NASDAQ:FISI) will increase its dividend from last year's comparable payment on the 2nd of April to $0.31. This will take the annual payment to 4.6% of the stock price, which is above what most companies in the industry pay.
See our latest analysis for Financial Institutions
Financial Institutions' Payment Expected To Have Solid Earnings Coverage
We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable.
Financial Institutions has established itself as a dividend paying company with over 10 years history of distributing earnings to shareholders. But while this history shows that the company was able to sustain its dividend for a decent period of time, its most recent earnings report shows that the company did not make enough earnings to cover its dividend payout. This is an alarming sign for the sustainability of its dividends, as it may mean that Financial Institutionsis pulling cash from elsewhere to keep its shareholders happy.
According to analysts, EPS should be several times higher in the next 3 years. In addtion, they also estimate the future payout ratio could reach 33% in the same time period, which we would be comfortable to see continuing.
Financial Institutions 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. Since 2015, the dividend has gone from $0.76 total annually to $1.24. This works out to be a compound annual growth rate (CAGR) of approximately 5.0% a year over that time. Companies like this can be very valuable over the long term, if the decent rate of growth can be maintained.
Dividend Growth May Be Hard To Come By
Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Let's not jump to conclusions as things might not be as good as they appear on the surface. In the last five years, Financial Institutions' earnings per share has shrunk at approximately 5.3% per annum. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this can turn into a longer term trend.
We should note that Financial Institutions has issued stock equal to 30% of shares outstanding. 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.