The board of United Security Bancshares (NASDAQ:UBFO) has announced that it will pay a dividend on the 18th of January, with investors receiving US$0.11 per share. This makes the dividend yield 5.5%, which will augment investor returns quite nicely.
United Security Bancshares Is Paying Out More Than It Is Earning
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before this announcement, United Security Bancshares was paying out 86% of earnings, but a comparatively small 62% of free cash flows. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.
Earnings per share could rise by 2.8% over the next year if things go the same way as they have for the last few years. However, if the dividend continues growing along recent trends, it could start putting pressure on the balance sheet with the payout ratio reaching 104% over the next year.
United Security Bancshares Doesn't Have A Long Payment History
The dividend's track record has been pretty solid, but with only 5 years of history we want to see a few more years of history before making any solid conclusions. The dividend has gone from US$0.20 in 2016 to the most recent annual payment of US$0.44. This implies that the company grew its distributions at a yearly rate of about 17% over that duration. We're not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.
Dividend Growth May Be Hard To Achieve
Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Earnings per share has been crawling upwards at 2.8% per year. Slow growth and a high payout ratio could mean that United Security Bancshares has maxed out the amount that it has been able to pay to shareholders. That's fine as far as it goes, but we're less enthusiastic as this often signals that the dividend is likely to grow slower in the future.
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about United Security Bancshares' payments, as there could be some issues with sustaining them into the future. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would be a touch cautious of relying on this stock primarily for the dividend income.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 1 warning sign for United Security Bancshares that investors should know about before committing capital to this stock. We have also put together a list of global stocks with a solid dividend.
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