Four Days Left To Buy Alliance Data Systems Corporation (NYSE:ADS) Before The Ex-Dividend Date
Readers hoping to buy Alliance Data Systems Corporation (NYSE:ADS) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Ex-dividend means that investors that purchase the stock on or after the 11th of February will not receive this dividend, which will be paid on the 18th of March.
Alliance Data Systems's next dividend payment will be US$0.21 per share, on the back of last year when the company paid a total of US$0.84 to shareholders. Looking at the last 12 months of distributions, Alliance Data Systems has a trailing yield of approximately 1.0% on its current stock price of $84.86. If you buy this business for its dividend, you should have an idea of whether Alliance Data Systems's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
Check out our latest analysis for Alliance Data Systems
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Alliance Data Systems paid out just 20% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Luckily it paid out just 3.3% of its free cash flow last year.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see Alliance Data Systems's earnings per share have dropped 7.1% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Alliance Data Systems has seen its dividend decline 20% per annum on average over the past four years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.
The Bottom Line
Has Alliance Data Systems got what it takes to maintain its dividend payments? Earnings per share are down meaningfully, although at least the company is paying out a low and conservative percentage of both its earnings and cash flow. It's definitely not great to see earnings falling, but at least there may be some buffer before the dividend needs to be cut. Overall, it's hard to get excited about Alliance Data Systems from a dividend perspective.
While it's tempting to invest in Alliance Data Systems for the dividends alone, you should always be mindful of the risks involved. To help with this, we've discovered 4 warning signs for Alliance Data Systems (1 can't be ignored!) that you ought to be aware of before buying the shares.
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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