Only Four Days Left To Cash In On PayPoint's (LON:PAY) Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see PayPoint plc (LON:PAY) is about to trade ex-dividend in the next four days. Investors can purchase shares before the 4th of February in order to be eligible for this dividend, which will be paid on the 8th of March.

PayPoint's next dividend payment will be UK£0.078 per share, on the back of last year when the company paid a total of UK£0.31 to shareholders. Calculating the last year's worth of payments shows that PayPoint has a trailing yield of 5.0% on the current share price of £6.22. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for PayPoint

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. PayPoint is paying out an acceptable 51% of its profit, a common payout level among most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the last year it paid out 51% of its free cash flow as dividends, within the usual range for most companies.

It's positive to see that PayPoint's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That explains why we're not overly excited about PayPoint's flat earnings over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. Earnings per share growth has been slim, and the company is already paying out a majority of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, PayPoint has lifted its dividend by approximately 3.7% a year on average.

To Sum It Up

Should investors buy PayPoint for the upcoming dividend? Earnings per share have barely grown, and although PayPoint paid out over half its earnings and free cash flow last year, the payout ratios are within a normal range for most companies. In summary, it's hard to get excited about PayPoint from a dividend perspective.

If you want to look further into PayPoint, it's worth knowing the risks this business faces. Our analysis shows 3 warning signs for PayPoint that we strongly recommend you have a look at before investing in the company.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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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. 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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