It looks like First American Financial Corporation (NYSE:FAF) is about to go ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 6th of September will not receive this dividend, which will be paid on the 16th of September.
First American Financial's upcoming dividend is US$0.42 a share, following on from the last 12 months, when the company distributed a total of US$1.68 per share to shareholders. Last year's total dividend payments show that First American Financial has a trailing yield of 2.9% on the current share price of $58.45. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Fortunately First American Financial's payout ratio is modest, at just 35% of profit.
Generally speaking, the lower a company's payout ratios, the more resilient its dividend usually is.
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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see First American Financial has grown its earnings rapidly, up 22% 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 last 9 years, First American Financial has lifted its dividend by approximately 24% 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.
The Bottom Line
Has First American Financial got what it takes to maintain its dividend payments? Companies like First American Financial that are growing rapidly and paying out a low fraction of earnings, are usually reinvesting heavily in their business. 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 First American Financial more closely.
Wondering what the future holds for First American Financial? See what the six analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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If you spot an error that warrants correction, please contact the editor at email@example.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.