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The board of Heritage Financial Corporation (NASDAQ:HFWA) has announced that it will pay a dividend on the 17th of November, with investors receiving US$0.21 per share. This makes the dividend yield 3.2%, which will augment investor returns quite nicely.
Heritage Financial's Payment Has Solid Earnings Coverage
If the payments aren't sustainable, a high yield for a few years won't matter that much. However, prior to this announcement, Heritage Financial's dividend was comfortably covered by both cash flow and earnings. This means that most of what the business earns is being used to help it grow.
EPS is set to fall by 22.7% over the next 12 months. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be 42%, which is comfortable for the company to continue in the future.
Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2011, the first annual payment was US$0.12, compared to the most recent full-year payment of US$0.80. This means that it has been growing its distributions at 21% per annum over that time. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.
The Dividend Looks Likely To Grow
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 encouraging to see Heritage Financial has been growing its earnings per share at 18% a year over the past five years. A low payout ratio and decent growth suggests that the company is reinvesting well, and it also has plenty of room to increase the dividend over time.
We Really Like Heritage Financial's Dividend
Overall, we like to see the dividend staying consistent, and we think Heritage Financial might even raise payments in the future. The company is generating plenty of cash, and the earnings also quite easily cover the distributions. However, it is worth noting that the earnings are expected to fall over the next year, which may not change the long term outlook, but could affect the dividend payment in the next 12 months. All in all, this checks a lot of the boxes we look for when choosing an income stock.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For example, we've identified 2 warning signs for Heritage Financial (1 is significant!) that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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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