PayPoint (LON:PAY) Will Pay A Larger Dividend Than Last Year At UK£0.09

PayPoint plc (LON:PAY) has announced that it will be increasing its dividend on the 30th of September to UK£0.09. This will take the annual payment to 6.1% of the stock price, which is above what most companies in the industry pay.

Check out our latest analysis for PayPoint

PayPoint's Payment Has Solid Earnings Coverage

If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, PayPoint's dividend was only 61% of earnings, however it was paying out 210% of free cash flows. While the company may be more focused on returning cash to shareholders than growing the business at this time, we think that a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.

Over the next year, EPS is forecast to fall by 5.2%. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be 62%, which is comfortable for the company to continue in the future.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The first annual payment during the last 10 years was UK£0.24 in 2012, and the most recent fiscal year payment was UK£0.36. This means that it has been growing its distributions at 4.0% per annum over that time. 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 Is Doubtful

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. In the last five years, PayPoint's earnings per share has shrunk at approximately 8.0% per annum. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth.

PayPoint's Dividend Doesn't Look Sustainable

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While PayPoint is earning enough to cover the payments, the cash flows are lacking. We would probably look elsewhere for an income investment.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come across 4 warning signs for PayPoint you should be aware of, and 2 of them are concerning. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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