Do These 3 Checks Before Buying Discover Financial Services (NYSE:DFS) For Its Upcoming Dividend
Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Discover Financial Services (NYSE:DFS) is about to trade ex-dividend in the next four days. Investors can purchase shares before the 18th of November in order to be eligible for this dividend, which will be paid on the 3rd of December.
Discover Financial Services’s upcoming dividend is US$0.44 a share, following on from the last 12 months, when the company distributed a total of US$1.76 per share to shareholders. Based on the last year’s worth of payments, Discover Financial Services stock has a trailing yield of around 2.4% on the current share price of $73.39. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Discover Financial Services can afford its dividend, and if the dividend could grow.
Check out our latest analysis for Discover Financial Services
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Discover Financial Services paid out 53% of its earnings to investors last year, a normal payout level for most businesses.
Generally speaking, the lower a company’s payout ratios, the more resilient its dividend usually is.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we’re discomforted by Discover Financial Services’s 7.7% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Discover Financial Services has delivered an average of 36% per year annual increase in its dividend, based on the past 10 years of dividend payments. That’s interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company’s profits. This can be valuable for shareholders, but it can’t go on forever.
Final Takeaway
Has Discover Financial Services got what it takes to maintain its dividend payments? We’re not overly enthused to see Discover Financial Services’s earnings in retreat at the same time as the company is paying out more than half of its earnings as dividends to shareholders. This is not an overtly appealing combination of characteristics, and we’re just not that interested in this company’s dividend.
So if you’re still interested in Discover Financial Services despite it’s poor dividend qualities, you should be well informed on some of the risks facing this stock. Be aware that Discover Financial Services is showing 4 warning signs in our investment analysis, and 1 of those is concerning…
We wouldn’t recommend just buying the first dividend stock you see, though. Here’s a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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. 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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