Today we’ll take a closer look at The Bank of N.T. Butterfield & Son Limited (NYSE:NTB) from a dividend investor’s perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.
In this case, Bank of N.T. Butterfield & Son likely looks attractive to investors, given its 5.1% dividend yield and a payment history of over ten years. We’d guess that plenty of investors have purchased it for the income. The company also bought back stock during the year, equivalent to approximately 5.8% of the company’s market capitalisation at the time. There are a few simple ways to reduce the risks of buying Bank of N.T. Butterfield & Son for its dividend, and we’ll go through these below.
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NYSE:NTB Historical Dividend Yield, February 6th 2020
Payout ratios
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. In the last year, Bank of N.T. Butterfield & Son paid out 51% of its profit as dividends. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.
We update our data on Bank of N.T. Butterfield & Son every 24 hours, so you can always get our latest analysis of its financial health, 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. Bank of N.T. Butterfield & Son has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past ten-year period, the first annual payment was US$1.60 in 2010, compared to US$1.76 last year. Dividend payments have grown at less than 1% a year over this period.
It’s good to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth, anyway. We’re not that enthused by this.
Dividend Growth Potential
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. It’s good to see Bank of N.T. Butterfield & Son has been growing its earnings per share at 26% a year over the past five years. Earnings per share are sharply up, but we wonder if paying out more than half its earnings (leaving less for reinvestment) is an implicit signal that Bank of N.T. Butterfield & Son’s growth will be slower in the future.
Conclusion
To summarise, shareholders should always check that Bank of N.T. Butterfield & Son’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Bank of N.T. Butterfield & Son’s payout ratio is within normal bounds. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. In summary, we’re unenthused by Bank of N.T. Butterfield & Son as a dividend stock. It’s not that we think it is a bad company; it simply falls short of our criteria in some key areas.
Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 4 analysts we track are forecasting for Bank of N.T. Butterfield & Son for free with public analyst estimates for the company.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding 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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