Read This Before Buying Santander Consumer USA Holdings Inc. (NYSE:SC) For Its Dividend
Is Santander Consumer USA Holdings Inc. (NYSE:SC) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.
With a goodly-sized dividend yield despite a relatively short payment history, investors might be wondering if Santander Consumer USA Holdings is a new dividend aristocrat in the making. It sure looks interesting on these metrics - but there's always more to the story . During the year, the company also conducted a buyback equivalent to around 4.4% of its market capitalisation. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.
Explore this interactive chart for our latest analysis on Santander Consumer USA Holdings!
Payout ratios
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, Santander Consumer USA Holdings paid out 30% of its profit as dividends. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.
Consider getting our latest analysis on Santander Consumer USA 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. Looking at the data, we can see that Santander Consumer USA Holdings has been paying a dividend for the past six years. It's good to see that Santander Consumer USA Holdings has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past six-year period, the first annual payment was US$1.42 in 2013, compared to US$0.88 last year. The dividend has shrunk at around 7.7% a year during that period. Santander Consumer USA Holdings's dividend has been cut sharply at least once, so it hasn't fallen by 7.7% every year, but this is a decent approximation of the long term change.
When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.
Dividend Growth Potential
Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Santander Consumer USA Holdings has grown its earnings per share at 5.4% per annum over the past five years. Earnings per share have been growing at a credible rate. What's more, the payout ratio is reasonable and provides some protection to the dividend, or even the potential to increase it.
Conclusion
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Firstly, we like that Santander Consumer USA Holdings has a low and conservative payout ratio. Second, earnings growth has been ordinary, and its history of dividend payments is chequered - having cut its dividend at least once in the past. Santander Consumer USA Holdings might not be a bad business, but it doesn't show all of the characteristics we look for in a dividend stock.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 13 Santander Consumer USA Holdings analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
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.
