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Deluxe Corporation (NYSE:DLX) has declared a dividend payment of $0.30 per share, scheduled for September 3rd. This dividend translates to a yield of 5.8%, which is set to enhance returns for shareholders.
Dividend Sustainability Concerns
While a high dividend yield can be appealing, its long-term attractiveness hinges on the sustainability of the payments. Prior to this announcement, Deluxe Corporation was distributing 138% of its earnings as dividends. Despite this, the company’s dividends were comfortably covered by free cash flows, with a cash payout ratio of 43%. Free cash flow coverage is crucial, as it reflects the company's ability to support dividend payments through actual cash rather than accounting profits.
Looking ahead, earnings per share (EPS) are projected to grow by 40.2% over the next year. If the dividend remains at its current level, the payout ratio could reach 99%, which may strain the company's financial resources and impact its ability to sustain the dividend without affecting the balance sheet.
Historical Dividend Stability
Deluxe Corporation has a history of consistent dividend payments. Since 2014, the annual dividend has increased from $1.00 to $1.20, reflecting a compound annual growth rate (CAGR) of approximately 1.8%. This stability in payments is notable, although the growth rate has been relatively modest.
Potential for Future Dividend Growth
Despite the stable dividend history, recent performance raises concerns. Over the past five years, EPS has declined by 17%, which poses a challenge for maintaining dividend payments. A significant drop in earnings can put pressure on even conservative payout ratios. However, with projected improvements in earnings for the coming year, there may be potential for better dividend sustainability. Observing whether this positive trend continues will be important before drawing definitive conclusions about future dividend prospects.
In summary, Deluxe Corporation's dividend yield is attractive, but its sustainability is subject to scrutiny due to historical earnings challenges and high payout ratios. While the company has shown a stable dividend track record, ongoing financial performance will be crucial in determining the future reliability of its dividend payments.
