It Might Not Be A Great Idea To Buy ABC arbitrage SA (EPA:ABCA) For Its Next Dividend

ABC arbitrage SA (EPA:ABCA) stock is about to trade ex-dividend in three days. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. Accordingly, ABC arbitrage investors that purchase the stock on or after the 22nd of April will not receive the dividend, which will be paid on the 24th of April.

The company's next dividend payment will be €0.10 per share. Last year, in total, the company distributed €0.30 to shareholders. Last year's total dividend payments show that ABC arbitrage has a trailing yield of 5.0% on the current share price of €6.02. 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.

Our free stock report includes 2 warning signs investors should be aware of before investing in ABC arbitrage. Read for free now.

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. ABC arbitrage distributed an unsustainably high 180% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious.

When a company pays out a dividend that is not well covered by profits, the dividend is generally seen as more vulnerable to being cut.

See our latest analysis for ABC arbitrage

Click here to see how much of its profit ABC arbitrage paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at ABC arbitrage, with earnings per share up 7.6% on average over the last five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. ABC arbitrage has seen its dividend decline 2.8% per annum on average over the past 10 years, which is not great to see. ABC arbitrage is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.

To Sum It Up

Is ABC arbitrage worth buying for its dividend? While we like that its earnings are growing somewhat, we're not enamored that it's paying out 180% of last year's earnings. This is not an overtly appealing combination of characteristics, and we're just not that interested in this company's dividend.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with ABC arbitrage. For example, ABC arbitrage has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.