Don't Race Out To Buy Response Plus Holding PJSC (ADX:RPM) Just Because It's Going Ex-Dividend

Response Plus Holding PJSC (ADX:RPM) is about to trade ex-dividend in the next 3 days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Thus, you can purchase Response Plus Holding PJSC's shares before the 21st of August in order to receive the dividend, which the company will pay on the 12th of September.

The company's next dividend payment will be د.إ0.075 per share, and in the last 12 months, the company paid a total of د.إ0.32 per share. Based on the last year's worth of payments, Response Plus Holding PJSC has a trailing yield of 8.6% on the current stock price of د.إ3.72. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Response Plus Holding PJSC can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Response Plus Holding PJSC

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Response Plus Holding PJSC distributed an unsustainably high 151% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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 distributed 36% of its free cash flow as dividends, a comfortable payout level for most companies.

It's good to see that while Response Plus Holding PJSC's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit Response Plus Holding PJSC paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Response Plus Holding PJSC's earnings per share have plummeted approximately 97% a year over the previous five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Response Plus Holding PJSC's dividend payments per share have declined at 20% per year on average over the past two years, which is uninspiring. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

The Bottom Line

Has Response Plus Holding PJSC got what it takes to maintain its dividend payments? It's not a great combination to see a company with earnings in decline and paying out 151% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Response Plus Holding PJSC's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Response Plus Holding PJSC.

With that in mind though, if the poor dividend characteristics of Response Plus Holding PJSC don't faze you, it's worth being mindful of the risks involved with this business. Every company has risks, and we've spotted 1 warning sign for Response Plus Holding PJSC you should know about.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.