Information Services Corporation (TSE:ISV) is about to trade ex-dividend in the next 3 days. You will need to purchase shares before the 30th of March to receive the dividend, which will be paid on the 15th of April.
Information Services's upcoming dividend is CA$0.20 a share, following on from the last 12 months, when the company distributed a total of CA$0.80 per share to shareholders. Last year's total dividend payments show that Information Services has a trailing yield of 5.7% on the current share price of CA$13.97. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Information Services can afford its dividend, and if the dividend could grow.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Information Services is paying out an acceptable 72% of its profit, a common payout level among most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Dividends consumed 67% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
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.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're not enthused to see that Information Services's earnings per share have remained effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share. Earnings per share growth has been slim, and the company is already paying out a majority of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Information Services's dividend payments are broadly unchanged compared to where they were seven years ago.
The Bottom Line
Has Information Services got what it takes to maintain its dividend payments? Earnings per share have barely grown, and although Information Services paid out over half its earnings and free cash flow last year, the payout ratios are within a normal range for most companies. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.
With that being said, if dividends aren't your biggest concern with Information Services, you should know about the other risks facing this business. To help with this, we've discovered 2 warning signs for Information Services (1 shouldn't be ignored!) that you ought to be aware of before buying the shares.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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