Newtek Business Services Corp.’s (NASDAQ:NEWT) dividend will be increasing to US$0.90 on 30th of September. This will take the annual payment from 7.2% to 9.1% of the stock price, which is above what most companies in the industry pay.

View our latest analysis for Newtek Business Services

Newtek Business Services Doesn’t Earn Enough To Cover Its Payments

Impressive dividend yields are good, but this doesn’t matter much if the payments can’t be sustained. Prior to this announcement, Newtek Business Services’ dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 196% of cash flows. This is certainly a risk factor, as reduced cash flows could force the company to pay a lower dividend.

EPS is set to fall by 2.2% over the next 12 months. Assuming the dividend continues along recent trends, we believe the payout ratio could reach 102%, which could put the dividend under pressure if earnings don’t start to improve.

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Newtek Business Services’ Dividend Has Lacked Consistency

It’s comforting to see that Newtek Business Services has been paying a dividend for a number of years now, however it has been cut at least once in that time. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. Since 2015, the first annual payment was US$1.56, compared to the most recent full-year payment of US$2.05. This implies that the company grew its distributions at a yearly rate of about 4.7% over that duration. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company’s earnings are not consistent.

Dividend Growth May Be Hard To Achieve

With a relatively unstable dividend, it’s even more important to see if earnings per share is growing. Earnings per share has been crawling upwards at 3.1% per year. Earnings are not growing quickly at all, and the company is paying out most of its profit as dividends. When the rate of return on reinvestment opportunities falls below a certain minimum level, companies often elect to pay a larger dividend instead. This is why many mature companies often have larger dividend yields.

The Dividend Could Prove To Be Unreliable

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The track record isn’t great, and the payments are a bit high to be considered sustainable. We don’t think Newtek Business Services is a great stock to add to your portfolio if income is your focus.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Case in point: We’ve spotted 6 warning signs for Newtek Business Services (of which 2 can’t be ignored!) you should know about. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.

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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