Income investors seek a steady stream of dividends. American Financial Group’s dividend history is long and it might make a great addition to an income portfolio. Let’s take a look at the business, dividend history, and payout safety going forward.
Business Overview and Highlights
American Financial Group (NYSE: AFG) is a $9.1 billion business. The company is based out of Cincinnati, Ohio and it employs 6,700 people. Last year American Financial Group pulled in $7.2 billion in sales and that breaks down to $1.1 million per employee.
The company operates within the financial sector and maintains a solid credit rating (BBB+) from the S&P. This allows American Financial Group to issue cheap debt to expand operations and pay dividends.
On May 1, 2019, the board of directors declared a special cash dividend of $1.50 per share. The special dividend will be made payable on May 28 to shareholders of record on May 15. The special dividend is in addition to the company’s regular quarterly cash dividend of $0.40.
American Financial Group’s 10-Year Dividend History
The company paid investors $0.52 per share a decade ago. Over the last 10 years, the dividend has climbed to $4.45. That’s a 756% increase and you can see the annual changes below…
The compound annual growth is 23.9% over 10 years… but over the last year, the total dividend fell by 7%. The annual decrease doesn’t look good but American Financial Group paid investors two special cash dividends. In 2017 the company paid a total of $3.50 in special dividends, while in 2018 the payout was just $3.00. Additionally, the regular quarterly dividend has continued to climb over the years. American Financial Group may be a great income investment. Let’s take a look at the yield…
Current Yield vs. 10-Year Average
American Financial Group’s long history of paying dividends makes it one of the best dividend stocks around. This also makes the dividend yield a great indicator of value. A higher yield is generally better for buyers. Sustainability is also vital and we’ll look at that soon.
The dividend yield comes in at 1.57% and that’s below the 10-year average of 2.06%. The chart below shows the dividend yield over the last 10 years…
The lower yield shows that investors have bid up the company’s market value. They might be expecting higher growth and payouts. But more often than not, the dividend yield is mean reverting with share price changes.
Improved Dividend Safety Check
Many investors look at the payout ratio to determine dividend safety. They look at the dividend per share divided by the net income per share. So, a payout ratio of 60% would mean that every $1 American Financial Group earns, it pays investors $0.60.
The payout ratio is a good indicator of dividend safety… but accountants can manipulate net income. They adjust for goodwill and other non-cash items. A better metric is free cash flow.
Here’s American Financial Group’s payout ratio based on free cash flow over the last 10 years…
The ratio is volatile over the last 10 years and the trend is up. American Financial Group reported $2.08 billion in free cash last year. The graph shows the company had a solid payout ratio of 19.8%. This gives wiggle room for American Financial Group’s board of directors to raise the dividend.
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