In This Article:
Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see PayPoint plc (LON:PAY) is about to trade ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 27th of August will not receive the dividend, which will be paid on the 28th of September.
PayPoint's next dividend payment will be UK£0.078 per share, and in the last 12 months, the company paid a total of UK£0.58 per share. Last year's total dividend payments show that PayPoint has a trailing yield of 9.0% on the current share price of £6.4. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.
View our latest analysis for PayPoint
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. PayPoint paid out 59% of its earnings to investors last year, a normal payout level for most businesses. 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 75% 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.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see PayPoint earnings per share are up 3.1% per annum over the last five years. 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.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. PayPoint has delivered 12% dividend growth per year on average over the past 10 years. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.