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Attention dividend hunters! Alliance Data Systems Corporation (NYSE:ADS) will be distributing its dividend of US$0.63 per share on the 18 June 2019, and will start trading ex-dividend in 4 days time on the 13 May 2019. Investors looking for higher income-generating stocks to add to their portfolio should keep reading, as I take a deeper dive into Alliance Data Systems’s latest financial data to analyse its dividend attributes.
5 checks you should do on a dividend stock
When assessing a stock as a potential addition to my dividend Portfolio, I look at these five areas:
- Does it pay an annual yield higher than 75% of dividend payers?
- Has it paid dividend every year without dramatically reducing payout in the past?
- Has it increased its dividend per share amount over the past?
- Can it afford to pay the current rate of dividends from its earnings?
- Will it have the ability to keep paying its dividends going forward?
Does Alliance Data Systems pass our checks?
The current trailing twelve-month payout ratio for the stock is 13%, which means that the dividend is covered by earnings. However, going forward, analysts expect ADS’s payout to fall to 10% of its earnings. Assuming a constant share price, this equates to a dividend yield of around 1.7%. However, EPS should increase to $18.44, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.
When thinking about whether a dividend is sustainable, another factor to consider is the cash flow. A company with strong cash flow, relative to earnings, can sometimes sustain a high pay out ratio.
If dividend is a key criteria in your investment consideration, then you need to make sure the dividend stock you’re eyeing out is reliable in its payments. Unfortunately, it is really too early to view Alliance Data Systems as a dividend investment. It has only been consistently paying dividends for 3 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.
Compared to its peers, Alliance Data Systems generates a yield of 1.7%, which is high for IT stocks but still below the market’s top dividend payers.
If you are building an income portfolio, then Alliance Data Systems is a complicated choice since it has some positive aspects as well as negative ones. But if you are not exclusively a dividend investor, the stock could still be an interesting investment opportunity. Given that this is purely a dividend analysis, I recommend taking sufficient time to understand its core business and determine whether the company and its investment properties suit your overall goals. I’ve put together three important factors you should look at:
- Future Outlook: What are well-informed industry analysts predicting for ADS’s future growth? Take a look at our free research report of analyst consensus for ADS’s outlook.
- Valuation: What is ADS worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether ADS is currently mispriced by the market.
- Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
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 email@example.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.