Ark Restaurants Corp. (NASDAQ:ARKR) stock is about to trade ex-dividend in 4 days time. This means that investors who purchase shares on or after the 20th of September will not receive the dividend, which will be paid on the 7th of October.
Ark Restaurants’s next dividend payment will be US$0.25 per share, and in the last 12 months, the company paid a total of US$1.00 per share. Calculating the last year’s worth of payments shows that Ark Restaurants has a trailing yield of 4.9% on the current share price of $20.3. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it’s growing.
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. It paid out 82% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We’d be worried about the risk of a drop in earnings. 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. It paid out more than half (59%) of its free cash flow in the past year, which is within an average range for most companies.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
Have Earnings And Dividends Been Growing?
Companies that aren’t growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That explains why we’re not overly excited about Ark Restaurants’s flat earnings over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. A high payout ratio of 82% generally happens when a company can’t find better uses for the cash. Combined with slim earnings growth in the past few years, Ark Restaurants could be signalling that its future growth prospects are thin.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Ark Restaurants has seen its dividend decline 5.5% per annum on average over the past ten years, which is not great to see.
The Bottom Line
From a dividend perspective, should investors buy or avoid Ark Restaurants? Earnings per share have barely grown, and although Ark Restaurants paid out over half its earnings and free cash flow last year, the payout ratios are within a normal range for most companies. Overall, it’s hard to get excited about Ark Restaurants from a dividend perspective.
Curious about whether Ark Restaurants has been able to consistently generate growth? Here’s a chart of its historical revenue and earnings growth.
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.
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