Know This Before Buying Alliance Data Systems Corporation (NYSE:ADS) For Its Dividend
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A sizeable part of portfolio returns can be produced by dividend stocks due to their contribution to compounding returns in the long run. Alliance Data Systems Corporation (NYSE:ADS) has recently paid dividends to shareholders, and currently yields 1.4%. Let's dig deeper into whether Alliance Data Systems should have a place in your portfolio.
See our latest analysis for Alliance Data Systems
How I analyze a dividend stock
When assessing a stock as a potential addition to my dividend Portfolio, I look at these five areas:
Is it paying an annual yield above 75% of dividend payers?
Does it consistently pay out dividends without missing a payment of significantly cutting payout?
Has dividend per share amount increased over the past?
Does earnings amply cover its dividend payments?
Will it have the ability to keep paying its dividends going forward?
How well does Alliance Data Systems fit our criteria?
The company currently pays out 13% of its earnings as a dividend, according to its trailing twelve-month data, meaning the dividend is sufficiently covered by earnings. However, going forward, analysts expect ADS's payout to fall to 9.0% of its earnings. Assuming a constant share price, this equates to a dividend yield of 1.4%. In addition to this, EPS is also forecasted to fall to $16.54 in the upcoming year. The lower EPS on top of a lower payout ratio will lead to a fall in dividend payment moving forward.
When assessing the forecast sustainability of a dividend it is also worth considering the cash flow of the business. Companies with strong cash flow can sustain a higher payout ratio, while companies with weaker cash flow generally cannot.
If there's one type of stock you want to be reliable, it's dividend stocks and their stable income-generating ability. Unfortunately, it is really too early to view Alliance Data Systems as a dividend investment. It has only been consistently paying dividends for 2 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.
Compared to its peers, Alliance Data Systems has a yield of 1.4%, which is high for IT stocks but still below the low risk savings rate.
Next Steps:
Now you know to keep in mind the reason why investors should be careful investing in Alliance Data Systems for the dividend. But if you are not exclusively a dividend investor, the stock could still be an interesting investment opportunity. Given that this is purely a dividend analysis, you should always research extensively before deciding whether or not a stock is an appropriate investment for you. I always recommend analysing the company's fundamentals and underlying business before making an investment decision. There are three important factors you should look at:
Future Outlook: What are well-informed industry analysts predicting for ADS’s future growth? Take a look at our free research report of analyst consensus for ADS’s outlook.
Valuation: What is ADS worth today? Even if the stock is a cash cow, it's not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether ADS is currently mispriced by the market.
Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
