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Should Income Investors Look At PayPoint plc (LON:PAY) Before Its Ex-Dividend?

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Simply Wall St
·4 min read
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PayPoint plc (LON:PAY) stock is about to trade ex-dividend in four days. You can purchase shares before the 4th of February in order to receive the dividend, which the company will pay on the 8th of March.

PayPoint's next dividend payment will be UK£0.078 per share. Last year, in total, the company distributed UK£0.31 to shareholders. Based on the last year's worth of payments, PayPoint has a trailing yield of 5.0% on the current stock price of £6.22. If you buy this business for its dividend, you should have an idea of whether PayPoint's dividend is reliable and sustainable. As a result, readers should always check whether PayPoint has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for PayPoint

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. PayPoint paid out more than half (51%) of its earnings last year, which is a regular payout ratio for most companies. 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. Over the last year it paid out 51% of its free cash flow as dividends, within the usual range for most companies.

It's positive to see that PayPoint's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
historic-dividend

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're not enthused to see that PayPoint'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 growth has been slim and the company is paying out more than half 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.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, PayPoint has increased its dividend at approximately 3.7% a year on average.

The Bottom Line

From a dividend perspective, should investors buy or avoid PayPoint? Earnings per share have barely grown, and although PayPoint 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 hard to get excited about PayPoint from a dividend perspective.

So if you want to do more digging on PayPoint, you'll find it worthwhile knowing the risks that this stock faces. Be aware that PayPoint is showing 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.