Alliance Data Systems Corporation (NYSE:ADS) investors are due to receive a payout of $0.21 per share on March 18. The dividend yield will be 28% based on this payment, which is still above the industry average.
See our latest analysis for Alliance Data Systems
Alliance Data Systems pays more than it earns
Impressive dividend yields are good, but that doesn’t matter much if payouts can’t be sustained. However, prior to this announcement, Alliance Data Systems’ dividend was comfortably covered by both cash flow and earnings. This means that most of what the business earns is used to help it grow.
Over the next year, EPS is expected to fall by 30.1%. If the dividend continues on the path it has recently taken, the 12-month payout ratio could be 164%, which is certainly a bit high to be sustainable in the future.
Alliance Data Systems dividend lacks consistency
It’s heartening to see that Alliance Data Systems has been paying a dividend for a number of years now, but it’s been cut at least once during that time. This suggests that the dividend may not be the most reliable. Since 2017, the first annual payment was $2.08, compared to $0.84 for the last annual payment. This equates to a decline of approximately 60% over this period. A company that decreases its dividend over time is generally not what we are looking for.
The dividend should increase
Given that dividend payments have shrunk like a glacier in a warming world, we need to check if there are any bright spots on the horizon. Alliance Data Systems has impressed us by increasing EPS by 17% per year over the past five years. A low payout ratio and decent growth suggest the company is reinvesting well, and also has plenty of room to grow the dividend over time.
Alliance Data Systems looks like a great dividend
Overall, we think it’s a great income investment and we think keeping the dividend this year may have been a prudent choice. Profits easily cover company distributions, and the company generates plenty of cash. However, it should be noted that earnings are expected to fall over the next year, which may not change the long-term outlook, but could affect the dividend payment over the next 12 months. Overall, this checks a lot of the boxes we look for when choosing an income stock.
It is important to note that companies with a consistent dividend policy will generate greater investor confidence than those with an erratic one. At the same time, there are other factors that our readers should be aware of before investing capital in a stock. To this end, Alliance Data Systems has 3 warning signs (and 2 that are potentially serious) that we think you should know about. Looking for more high yield dividend ideas? Try our curated list of strong dividend payers.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.