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United Security Bancshares (NASDAQ:UBFO) has announced that it will pay a dividend of US$0.11 per share on the 25th of October. Based on this payment, the dividend yield on the company's stock will be 5.5%, which is an attractive boost to shareholder returns.
United Security Bancshares Is Paying Out More Than It Is Earning
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before this announcement, United Security Bancshares was paying out 90% of earnings, but a comparatively small 70% 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.
Over the next year, EPS could expand by 2.4% if the company continues along the path it has been on recently. Assuming the dividend continues along recent trends, we think the payout ratio could reach 111%, which probably can't continue without starting to put some pressure on the balance sheet.
United Security Bancshares Doesn't Have A Long Payment History
The dividend has been pretty stable looking back, but the company hasn't been paying one for very long. This makes it tough to judge how it would fare through a full economic cycle. The dividend has gone from US$0.20 in 2017 to the most recent annual payment of US$0.44. This works out to be a compound annual growth rate (CAGR) of approximately 22% a year over that time. The dividend has been growing rapidly, however with such a short payment history we can't know for sure if payment can continue to grow over the long term, so caution may be warranted.
Dividend Growth May Be Hard To Achieve
The company's investors will be pleased to have been receiving dividend income for some time. Earnings have grown at around 2.4% a year for the past five years, which isn't massive but still better than seeing them shrink. 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. When a company prefers to pay out cash to its shareholders instead of reinvesting it, this can often say a lot about that company's dividend prospects.
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. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. Overall, we don't think this company has the makings of a good income stock.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 1 warning sign for United Security Bancshares that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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