Alliance Data Systems Corporation (NYSE:ADS) has announced that it will pay a dividend of US$0.21 per share on the 17th of September. Based on this payment, the dividend yield will be 0.9%, which is fairly typical for the industry.

View our latest analysis for Alliance Data Systems

Alliance Data Systems' Earnings Easily Cover the Distributions

Solid dividend yields are great, but they only really help us if the payment is sustainable. However, prior to this announcement, Alliance Data Systems' dividend was comfortably covered by both cash flow and earnings. As a result, a large proportion of what it earned was being reinvested back into the business.

EPS is set to fall by 11.1% over the next 12 months. If the dividend continues along recent trends, we estimate the payout ratio could be 6.1%, which we consider to be quite comfortable, with most of the company's earnings left over to grow the business in the future.

Alliance Data Systems' Dividend Has Lacked Consistency

Alliance Data Systems has been paying dividends for a while, but the track record isn't stellar. This suggests that the dividend might not be the most reliable. The dividend has gone from US$2.08 in 2016 to the most recent annual payment of US$0.84. The dividend has fallen 60% over that period. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.

The Dividend Looks Likely To Grow

Given that the track record hasn't been stellar, we really want to see earnings per share growing over time. Alliance Data Systems has impressed us by growing EPS at 15% per year over the past five years. With a decent amount of growth and a low payout ratio, we think this bodes well for Alliance Data Systems' prospects of growing its dividend payments in the future.

We Really Like Alliance Data Systems' Dividend

In summary, it is good to see that the dividend is staying consistent, and we don't think there is any reason to suspect this might change over the medium term. The distributions are easily covered by earnings, and there is plenty of cash being generated as well. We should point out that the earnings are expected to fall over the next 12 months, which won't be a problem if this doesn't become a trend, but could cause some turbulence in the next year. All in all, this checks a lot of the boxes we look for when choosing an income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Just as an example, we've come across 5 warning signs for Alliance Data Systems you should be aware of, and 2 of them are a bit concerning. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.

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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