PayPoint's (LON:PAY) Dividend Will Be Increased To UK£0.083

PayPoint plc's (LON:PAY) dividend will be increasing to UK£0.083 on 30th of September. This will take the annual payment from 5.6% to 5.6% of the stock price, which is above what most companies in the industry pay.

See our latest analysis for PayPoint

PayPoint's Dividend Is Well Covered By Earnings

A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, the company was paying out 146% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 50%. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.

Looking forward, earnings per share is forecast to rise by 113.3% over the next year. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 67% which would be quite comfortable going to take the dividend forward.

Dividend Volatility

The company's dividend history has been marked by instability, with at least 1 cut in the last 10 years. Since 2011, the dividend has gone from UK£0.22 to UK£0.32. This works out to be a compound annual growth rate (CAGR) of approximately 3.8% a year over that time. We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments the total shareholder return may be limited.

The Dividend's Growth Prospects Are Limited

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. Earnings has been rising at 3.1% per annum over the last five years, which admittedly is a bit slow. The earnings growth is anaemic, and the company is paying out 146% of its profit. This gives limited room for the company to raise the dividend in the future.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think PayPoint's payments are rock solid. 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.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 4 warning signs for PayPoint that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.

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