Don't Race Out To Buy Ataa Educational Company (TADAWUL:4292) Just Because It's Going Ex-Dividend

Ataa Educational Company (TADAWUL:4292) stock is about to trade ex-dividend in three days. If you purchase the stock on or after the 12th of January, you won't be eligible to receive this dividend, when it is paid on the 1st of January.

Ataa Educational's next dividend payment will be ر.س1.00 per share, on the back of last year when the company paid a total of ر.س1.00 to shareholders. Based on the last year's worth of payments, Ataa Educational stock has a trailing yield of around 2.5% on the current share price of SAR39.8. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Ataa Educational

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Ataa Educational paid out more than half (62%) of its earnings last year, which is a regular payout ratio for most companies. 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. Dividends consumed 66% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's positive to see that Ataa Educational's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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

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. Ataa Educational's earnings per share have fallen at approximately 18% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Given that Ataa Educational has only been paying a dividend for a year, there's not much of a past history to draw insight from.

To Sum It Up

From a dividend perspective, should investors buy or avoid Ataa Educational? It's never good to see earnings per share shrinking, but at least the dividend payout ratios appear reasonable. We're aware though that if earnings continue to decline, the dividend could be at risk. Bottom line: Ataa Educational has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of Ataa Educational don't faze you, it's worth being mindful of the risks involved with this business. We've identified 2 warning signs with Ataa Educational (at least 1 which can't be ignored), and understanding these should be part of your investment process.

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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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. 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.
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