PayPoint (LON:PAY) Will Pay A Dividend Of £0.095

The board of PayPoint plc (LON:PAY) has announced that it will pay a dividend on the 5th of March, with investors receiving £0.095 per share. This will take the dividend yield to an attractive 7.6%, providing a nice boost to shareholder returns.

Check out our latest analysis for PayPoint

PayPoint's Earnings Easily Cover The Distributions

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Before this announcement, PayPoint was paying out 88% of earnings, but a comparatively small 22% of free cash flows. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.

Looking forward, earnings per share is forecast to rise by 81.1% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 49%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2014, the annual payment back then was £0.304, compared to the most recent full-year payment of £0.38. This means that it has been growing its distributions at 2.3% per annum over that time. The dividend has seen some fluctuations in the past, so even though the dividend was raised this year, we should remember that it has been cut in the past.

Dividend Growth May Be Hard To Come By

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Over the past five years, it looks as though PayPoint's EPS has declined at around 8.0% a year. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. This company is not in the top tier of income providing stocks.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Case in point: We've spotted 5 warning signs for PayPoint (of which 1 shouldn't be ignored!) you should know about. Is PayPoint not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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