Dividend paying stocks like Eagle Bancorp Montana, Inc. (NASDAQ:EBMT) 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.
While Eagle Bancorp Montana's 2.2% dividend yield is not the highest, we think its lengthy payment history is quite interesting. The company also bought back stock during the year, equivalent to approximately 0.8% of the company's market capitalisation at the time. There are a few simple ways to reduce the risks of buying Eagle Bancorp Montana for its dividend, and we'll go through these below.
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Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. 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. Looking at the data, we can see that 38% of Eagle Bancorp Montana's profits were paid out as dividends in the last 12 months. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Plus, there is room to increase the payout ratio over time.
Remember, you can always get a snapshot of Eagle Bancorp Montana's latest financial position, by checking our visualisation of its financial health.
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. Eagle Bancorp Montana 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 by more than 20% on at least one occasion historically. During the past ten-year period, the first annual payment was US$1.04 in 2009, compared to US$0.37 last year. The dividend has shrunk at around 9.8% a year during that period. Eagle Bancorp Montana's dividend has been cut sharply at least once, so it hasn't fallen by -9.8% every year, but this is a decent approximation of the long term change.
Dividend Growth Potential
Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Eagle Bancorp Montana has grown its earnings per share at 7.4% per annum over the past five years. It's good to see decent earnings growth and a low payout ratio. Companies with these characteristics often display the fastest dividend growth over the long term - assuming earnings can be maintained, of course.
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 Eagle Bancorp Montana has a low payout ratio, as this suggests earnings are being reinvested in the business. Unfortunately, earnings growth has also been mediocre, and the company has cut its dividend at least once in the past. Eagle Bancorp Montana has a number of positive attributes, but falls short of our ideal dividend company. It may be worth a look at the right price, though.
You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in Eagle Bancorp Montana stock.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.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. Thank you for reading.