Deluxe Corporation (NYSE:DLX) will pay a dividend of $0.30 on the 2nd of June. Based on this payment, the dividend yield on the company’s stock will be 8.0%, which is an attractive boost to shareholder returns.
While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Deluxe’s stock price has reduced by 34% in the last 3 months, which is not ideal for investors and can explain a sharp increase in the dividend yield.
We’ve discovered 3 warning signs about Deluxe. View them for free.
If the payments aren’t sustainable, a high yield for a few years won’t matter that much. Before making this announcement, Deluxe’s dividend was higher than its profits, but the free cash flows quite comfortably covered it. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.
Earnings per share is forecast to rise by 21.8% over the next year. Assuming the dividend continues along recent trends, our estimates say the payout ratio could reach 79% – on the higher side, but we wouldn’t necessarily say this is unsustainable.
See our latest analysis for Deluxe
The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. The most recent annual payment of $1.20 is about the same as the annual payment 10 years ago. Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.
Some investors will be chomping at the bit to buy some of the company’s stock based on its dividend history. It’s encouraging to see that Deluxe has been growing its earnings per share at 44% a year over the past five years. EPS has been growing well, but Deluxe has been paying out a massive proportion of its earnings, which can make the dividend tough to maintain.
Overall, we don’t think this company makes a great dividend stock, even though the dividend wasn’t cut this year. The company has been bring in plenty of cash to cover the dividend, but we don’t necessarily think that makes it a great dividend stock. This company is not in the top tier of income providing stocks.
It’s important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Case in point: We’ve spotted 3 warning signs for Deluxe (of which 1 is significant!) you should know about. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.