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Is Provident Financial Holdings, Inc.'s (NASDAQ:PROV) 2.6% Dividend Sustainable?

Simply Wall St

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Could Provident Financial Holdings, Inc. (NASDAQ:PROV) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

A 2.6% yield is nothing to get excited about, but investors probably think the long payment history suggests Provident Financial Holdings has some staying power. The company also bought back stock during the year, equivalent to approximately 1.0% of the company's market capitalisation at the time. There are a few simple ways to reduce the risks of buying Provident Financial Holdings for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Provident Financial Holdings!

NasdaqGS:PROV Historical Dividend Yield, July 10th 2019

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Provident Financial Holdings paid out 83% of its profit as dividends, over the trailing twelve month period. It's paying out most of its earnings, which limits the amount that can be reinvested in the business. This may indicate limited need for further capital within the business, or highlight a commitment to paying a dividend.

Consider getting our latest analysis on Provident Financial Holdings's financial position here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Provident Financial Holdings has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. During the past ten-year period, the first annual payment was US$0.20 in 2009, compared to US$0.56 last year. Dividends per share have grown at approximately 11% per year over this time.

It's not great to see that the payment has been cut in the past. We're generally more wary of companies that have cut their dividend before, as they tend to perform worse in an economic downturn.

Dividend Growth Potential

The other half of the dividend investing equation is evaluating whether earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. In the last five years, Provident Financial Holdings's earnings per share have shrunk at approximately 23% per annum. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company's dividend.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. First, we think Provident Financial Holdings has an acceptable payout ratio. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. To conclude, we've spotted a couple of potential concerns with Provident Financial Holdings that may make it less than ideal candidate for dividend investors.

Are management backing themselves to deliver performance? Check their shareholdings in Provident Financial Holdings in our latest insider ownership analysis.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.