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It looks like Automatic Data Processing, Inc. (NASDAQ:ADP) is about to go ex-dividend in the next four days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Thus, you can purchase Automatic Data Processing's shares before the 9th of December in order to receive the dividend, which the company will pay on the 1st of January.
The company's next dividend payment will be US$1.04 per share, and in the last 12 months, the company paid a total of US$4.16 per share. Last year's total dividend payments show that Automatic Data Processing has a trailing yield of 1.8% on the current share price of $229.89. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.
See our latest analysis for Automatic Data Processing
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Automatic Data Processing paid out more than half (59%) of its earnings last year, which is a regular payout ratio for most companies. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the last year it paid out 71% of its free cash flow as dividends, within the usual range for most companies.
It's positive to see that Automatic Data Processing'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?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. Fortunately for readers, Automatic Data Processing's earnings per share have been growing at 14% a year for the past five years. Automatic Data Processing is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. Given the quick rate of earnings per share growth and current level of payout, there may be a chance of further dividend increases in the future.