Don't Race Out To Buy Saudi Arabian Oil Company (TADAWUL:2222) Just Because It's Going Ex-Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Saudi Arabian Oil Company (TADAWUL:2222) is about to trade ex-dividend in the next four days. Typically, the ex-dividend date is one business day 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 important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Thus, you can purchase Saudi Arabian Oil's shares before the 17th of November in order to receive the dividend, which the company will pay on the 26th of November.

The company's next dividend payment will be ر.س0.4815 per share, on the back of last year when the company paid a total of ر.س1.93 to shareholders. Calculating the last year's worth of payments shows that Saudi Arabian Oil has a trailing yield of 6.9% on the current share price of ر.س28.05. If you buy this business for its dividend, you should have an idea of whether Saudi Arabian Oil's dividend is reliable and sustainable. As a result, readers should always check whether Saudi Arabian Oil has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Saudi Arabian Oil

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. Its dividend payout ratio is 86% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. It could become a concern if earnings started to decline. A useful secondary check can be to evaluate whether Saudi Arabian Oil generated enough free cash flow to afford its dividend. Over the past year it paid out 135% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

While Saudi Arabian Oil's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Saudi Arabian Oil to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're not enthused to see that Saudi Arabian Oil's earnings per share have remained effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Saudi Arabian Oil has delivered an average of 16% per year annual increase in its dividend, based on the past five years of dividend payments.

Final Takeaway

From a dividend perspective, should investors buy or avoid Saudi Arabian Oil? Earnings per share have not grown and Saudi Arabian Oil's profit payout ratio looks reasonable. However, it paid out a disconcertingly high percentage of its cashflow, which is a worry. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Saudi Arabian Oil.

With that being said, if you're still considering Saudi Arabian Oil as an investment, you'll find it beneficial to know what risks this stock is facing. In terms of investment risks, we've identified 1 warning sign with Saudi Arabian Oil and understanding them should be part of your investment process.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.