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Read This Before Considering Automatic Data Processing, Inc. (NASDAQ:ADP) For Its Upcoming 0.5% Dividend

Simply Wall St

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Automatic Data Processing, Inc. (NASDAQ:ADP) is about to trade ex-dividend in the next 3 days. If you purchase the stock on or after the 12th of September, you won't be eligible to receive this dividend, when it is paid on the 1st of October.

Automatic Data Processing's upcoming dividend is US$0.79 a share, following on from the last 12 months, when the company distributed a total of US$3.16 per share to shareholders. Based on the last year's worth of payments, Automatic Data Processing has a trailing yield of 1.8% on the current stock price of $173.25. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Automatic Data Processing has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Automatic Data Processing

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Automatic Data Processing paid out more than half (58%) of its earnings last year, which is a regular payout ratio for most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out more than half (61%) of its free cash flow in the past year, which is within an average 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.

NasdaqGS:ADP Historical Dividend Yield, September 8th 2019

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Fortunately for readers, Automatic Data Processing's earnings per share have been growing at 15% 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.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Automatic Data Processing has increased its dividend at approximately 9.1% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

To Sum It Up

Is Automatic Data Processing worth buying for its dividend? Higher earnings per share generally lead to higher dividends from dividend-paying stocks over the long run. That's why we're glad to see Automatic Data Processing's earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow - 58% and 61% respectively. In summary, it's hard to get excited about Automatic Data Processing from a dividend perspective.

Wondering what the future holds for Automatic Data Processing? See what the 16 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

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.