Income Investors Should Know That Alliance Data Systems Corporation (NYSE:ADS) Goes Ex-Dividend Soon

Alliance Data Systems Corporation (NYSE:ADS) is about to trade ex-dividend in the next four days. If you purchase the stock on or after the 13th of August, you won't be eligible to receive this dividend, when it is paid on the 18th of September.

Alliance Data Systems's upcoming dividend is US$0.21 a share, following on from the last 12 months, when the company distributed a total of US$0.84 per share to shareholders. Based on the last year's worth of payments, Alliance Data Systems has a trailing yield of 1.8% on the current stock price of $46.15. 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 investigate whether Alliance Data Systems can afford its dividend, and if the dividend could grow.

View our latest analysis for Alliance Data Systems

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. That's why it's good to see Alliance Data Systems paying out a modest 32% of its earnings. 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. Luckily it paid out just 9.0% of its free cash flow last year.

It's positive to see that Alliance Data Systems'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.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see Alliance Data Systems's earnings per share have dropped 5.5% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Alliance Data Systems's dividend payments per share have declined at 20% per year on average over the past four years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

Final Takeaway

Should investors buy Alliance Data Systems for the upcoming dividend? Alliance Data Systems has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. To summarise, Alliance Data Systems looks okay on this analysis, although it doesn't appear a stand-out opportunity.

So while Alliance Data Systems looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Be aware that Alliance Data Systems is showing 5 warning signs in our investment analysis, and 1 of those can't be ignored...

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.

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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