Dividend Investors: Don’t Be Too Quick To Buy ARC Resources Ltd. (TSE:ARX) For Its Upcoming Dividend

ARC Resources Ltd. (TSE:ARX) is about to trade ex-dividend in the next 4 days. You can purchase shares before the 30th of July in order to receive the dividend, which the company will pay on the 15th of August.

ARC Resources’s next dividend payment will be CA$0.05 per share, and in the last 12 months, the company paid a total of CA$0.60 per share. Last year’s total dividend payments show that ARC Resources has a trailing yield of 9.4% on the current share price of CA$6.41. 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 ARC Resources can afford its dividend, and if the dividend could grow.

Check out our latest analysis for ARC Resources

If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. ARC Resources paid out a disturbingly high 203% of its profit as dividends last year, which makes us concerned there’s something we don’t fully understand in the business. 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. ARC Resources paid out more free cash flow than it generated – 187%, to be precise – last year, which we think is concerningly high. We’re curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Cash is slightly more important than profit from a dividend perspective, but given ARC Resources’s payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.

TSX:ARX Historical Dividend Yield, July 25th 2019
TSX:ARX Historical Dividend Yield, July 25th 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we’re discomforted by ARC Resources’s 18% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. ARC Resources’s dividend payments per share have declined at 16% per year on average over the past 10 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.

Final Takeaway

From a dividend perspective, should investors buy or avoid ARC Resources? It’s looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (203%) and cash flow (187%) as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company’s near future. With the way things are shaping up from a dividend perspective, we’d be inclined to steer clear of ARC Resources.

Ever wonder what the future holds for ARC Resources? See what the four analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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.