Should You Buy American Financial Group, Inc. (NYSE:AFG) For Its Upcoming Dividend?
American Financial Group, Inc. (NYSE:AFG) stock is about to trade ex-dividend in 4 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. This means that investors who purchase American Financial Group's shares on or after the 14th of October will not receive the dividend, which will be paid on the 25th of October.
The company's upcoming dividend is US$0.56 a share, following on from the last 12 months, when the company distributed a total of US$2.00 per share to shareholders. Based on the last year's worth of payments, American Financial Group has a trailing yield of 1.6% on the current stock price of $135.77. 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 investigate whether American Financial Group can afford its dividend, and if the dividend could grow.
See our latest analysis for American Financial Group
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. American Financial Group paid out just 13% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances.
When a company paid out less in dividends than it earned in profit, this generally suggests its dividend is affordable. The lower the % of its profit that it pays out, the greater the margin of safety for the dividend if the business enters a downturn.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's encouraging to see American Financial Group has grown its earnings rapidly, up 30% a year for the past five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, American Financial Group has increased its dividend at approximately 13% a year on average. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
Final Takeaway
Has American Financial Group got what it takes to maintain its dividend payments? When companies are growing rapidly and retaining a majority of the profits within the business, it's usually a sign that reinvesting earnings creates more value than paying dividends to shareholders. This strategy can add significant value to shareholders over the long term - as long as it's done without issuing too many new shares. We think this is a pretty attractive combination, and would be interested in investigating American Financial Group more closely.
So while American Financial Group looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Be aware that American Financial Group is showing 4 warning signs in our investment analysis, and 1 of those is significant...
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. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
