Here's Why We're Wary Of Buying Al-Jouf Agricultural Development's (TADAWUL:6070) For Its Upcoming Dividend

It looks like Al-Jouf Agricultural Development Co. (TADAWUL:6070) is about to go ex-dividend in the next 3 days. Investors can purchase shares before the 28th of January in order to be eligible for this dividend, which will be paid on the 1st of January.

Al-Jouf Agricultural Development's next dividend payment will be ر.س0.25 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, Al-Jouf Agricultural Development has a trailing yield of 2.7% on the current stock price of SAR37.25. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Al-Jouf Agricultural Development

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year, Al-Jouf Agricultural Development paid out 374% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Al-Jouf Agricultural Development paid out more free cash flow than it generated - 166%, 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 Al-Jouf Agricultural Development's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

Click here to see how much of its profit Al-Jouf Agricultural Development paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Al-Jouf Agricultural Development's earnings per share have plummeted approximately 48% a year over the previous five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Al-Jouf Agricultural Development's dividend payments per share have declined at 6.2% per year on average over the past eight 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.

The Bottom Line

Is Al-Jouf Agricultural Development an attractive dividend stock, or better left on the shelf? Not only are earnings per share declining, but Al-Jouf Agricultural Development is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders 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 Al-Jouf Agricultural Development.

Although, if you're still interested in Al-Jouf Agricultural Development and want to know more, you'll find it very useful to know what risks this stock faces. For instance, we've identified 4 warning signs for Al-Jouf Agricultural Development (1 is a bit concerning) you should be aware of.

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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