Dividend paying stocks like Fidelity National Financial, Inc. (NYSE:FNF) tend to be popular with investors, and for good reason – some research suggests a significant amount of all stock market returns come from reinvested dividends. Unfortunately, it’s common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
With Fidelity National Financial yielding 5.1% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. We’d guess that plenty of investors have purchased it for the income. The company also returned around 0.9% of its market capitalisation to shareholders in the form of stock buybacks over the past year. Remember that the recent share price drop will make Fidelity National Financial’s yield look higher, even though recent events might have impacted the company’s prospects. 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 Fidelity National Financial!
NYSE:FNF Historical Dividend Yield April 17th 2020
Payout ratios
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable – hardly an ideal situation. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Fidelity National Financial paid out 32% of its profit as dividends. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. Plus, there is room to increase the payout ratio over time.
Consider getting our latest analysis on Fidelity National Financial’s financial position here.
Dividend Volatility
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Fidelity National Financial has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut on at least one occasion historically. During the past ten-year period, the first annual payment was US$0.60 in 2010, compared to US$1.32 last year. This works out to be a compound annual growth rate (CAGR) of approximately 8.2% a year over that time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.
It’s good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Fidelity National Financial might have put its house in order since then, but we remain cautious.
Dividend Growth Potential
With a relatively unstable dividend, it’s even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there’s a good chance of bigger dividends in future? Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Fidelity National Financial has grown its earnings per share at 13% per annum over the past five years. Earnings per share have been growing at a good rate, and the company is paying less than half its earnings as dividends. We generally think this is an attractive combination, as it permits further reinvestment in the business.
Conclusion
Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We’re glad to see Fidelity National Financial has a low payout ratio, as this suggests earnings are being reinvested in the business. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. Fidelity National Financial has a credible record on several fronts, but falls slightly short of our standards for a dividend 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. For example, we’ve identified 3 warning signs for Fidelity National Financial (1 is a bit concerning!) that you should be aware of before investing.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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.
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