Readers hoping to buy Alliance Data Systems Corporation (NYSE:ADS) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 3rd of September to receive the dividend, which will be paid on the 26th of September.
Alliance Data Systems’s next dividend payment will be US$0.63 per share. Last year, in total, the company distributed US$2.52 to shareholders. Calculating the last year’s worth of payments shows that Alliance Data Systems has a trailing yield of 2.1% on the current share price of $122.75. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Alliance Data Systems has been able to grow its dividends, or if the dividend might be cut.
View our latest analysis for Alliance Data Systems
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Alliance Data Systems has a low and conservative payout ratio of just 15% of its income after tax. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. The good news is it paid out just 5.5% of its free cash flow in the last year.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. Fortunately for readers, Alliance Data Systems’s earnings per share have been growing at 10% a year for the past five years. Earnings per share are growing rapidly and the company is keeping more than half of its earnings within the business; an attractive combination which could suggest the company is focused on reinvesting to grow earnings further. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Alliance Data Systems has delivered 6.6% dividend growth per year on average over the past three years. It’s encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
Final Takeaway
Is Alliance Data Systems worth buying for its dividend? We love that Alliance Data Systems is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. Alliance Data Systems looks solid on this analysis overall, and we’d definitely consider investigating it more closely.
Ever wonder what the future holds for Alliance Data Systems? See what the 20 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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 editorial-team@simplywallst.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.