It looks like National Bankshares, Inc. (NASDAQ:NKSH) is about to go ex-dividend in the next 4 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. In other words, investors can purchase National Bankshares' shares before the 25th of November in order to be eligible for the dividend, which will be paid on the 2nd of December.
The company's upcoming dividend is US$0.78 a share, following on from the last 12 months, when the company distributed a total of US$1.51 per share to shareholders. Based on the last year's worth of payments, National Bankshares has a trailing yield of 4.8% on the current stock price of US$31.36. 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 check whether the dividend payments are covered, and if earnings are growing.
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. Last year National Bankshares paid out 105% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings.
When the dividend payout ratio is high, as it is in this case, the dividend is usually at greater risk of being cut in the future.
Click here to see how much of its profit National Bankshares paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. National Bankshares's earnings per share have fallen at approximately 10.0% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, National Bankshares has increased its dividend at approximately 2.9% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. National Bankshares is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
The Bottom Line
Has National Bankshares got what it takes to maintain its dividend payments? Not only are earnings per share shrinking, but National Bankshares is paying out a disconcertingly high percentage of its profit as dividends. It's not that we hate the business, but we feel that these characeristics are not desirable for investors seeking a reliable dividend stock to own for the long term. National Bankshares doesn't appear to have a lot going for it, and we're not inclined to take a risk on owning it for the dividend.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with National Bankshares. In terms of investment risks, we've identified 4 warning signs with National Bankshares and understanding them should be part of your investment process.
If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
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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.
