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Is It Smart To Buy First Merchants Corporation (NASDAQ:FRME) Before It Goes Ex-Dividend?

Simply Wall St

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see First Merchants Corporation (NASDAQ:FRME) is about to trade ex-dividend in the next 4 days. If you purchase the stock on or after the 5th of March, you won't be eligible to receive this dividend, when it is paid on the 20th of March.

First Merchants's next dividend payment will be US$0.26 per share, and in the last 12 months, the company paid a total of US$1.04 per share. Looking at the last 12 months of distributions, First Merchants has a trailing yield of approximately 3.0% on its current stock price of $34.97. If you buy this business for its dividend, you should have an idea of whether First Merchants's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for First Merchants

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. First Merchants paid out a comfortable 31% of its profit last year.

Companies that pay out less in dividends than they earn in profits generally have more sustainable dividends. The lower the payout ratio, the more wiggle room the business has before it could be forced to cut the dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

NasdaqGS:FRME Historical Dividend Yield, February 29th 2020

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. Fortunately for readers, First Merchants's earnings per share have been growing at 14% 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 ten years, First Merchants has increased its dividend at approximately 13% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

Final Takeaway

Is First Merchants an attractive dividend stock, or better left on the shelf? Companies like First Merchants that are growing rapidly and paying out a low fraction of earnings, are usually reinvesting heavily in their business. This is one of the most attractive investment combinations under this analysis, as it can create substantial value for investors over the long run. We think this is a pretty attractive combination, and would be interested in investigating First Merchants more closely.

Curious what other investors think of First Merchants? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.

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.

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.

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. Thank you for reading.