Stock Analysis

ARC Resources (TSE:ARX) Is Paying Out A Larger Dividend Than Last Year

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ARC Resources Ltd. (TSE:ARX) has announced that it will be increasing its dividend from last year's comparable payment on the 17th of April to CA$0.15. Despite this raise, the dividend yield of 4.0% is only a modest boost to shareholder returns.

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ARC Resources' Dividend Is Well Covered By Earnings

It would be nice for the yield to be higher, but we should also check if higher levels of dividend payment would be sustainable. However, prior to this announcement, ARC Resources' dividend was comfortably covered by both cash flow and earnings. This means that most of its earnings are being retained to grow the business.

Looking forward, earnings per share is forecast to rise by 47.9% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could be 8.4% by next year, which is in a pretty sustainable range.

TSX:ARX Historic Dividend March 19th 2023

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The dividend has gone from an annual total of CA$1.20 in 2013 to the most recent total annual payment of CA$0.60. Doing the maths, this is a decline of about 6.7% per year. A company that decreases its dividend over time generally isn't what we are looking for.

The Dividend Looks Likely To Grow

Given that the track record hasn't been stellar, we really want to see earnings per share growing over time. ARC Resources has impressed us by growing EPS at 28% per year over the past five years. Rapid earnings growth and a low payout ratio suggest this company has been effectively reinvesting in its business. Should that continue, this company could have a bright future.

We Really Like ARC Resources' Dividend

Overall, a dividend increase is always good, and we think that ARC Resources is a strong income stock thanks to its track record and growing earnings. Earnings are easily covering distributions, and the company is generating plenty of cash. All in all, this checks a lot of the boxes we look for when choosing an income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Just as an example, we've come across 2 warning signs for ARC Resources you should be aware of, and 1 of them doesn't sit too well with us. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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