Why It Might Not Make Sense To Buy Arabian Food and Dairy Factories Company (TADAWUL:9536) For Its Upcoming Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Arabian Food and Dairy Factories Company (TADAWUL:9536) is about to go ex-dividend in just 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Thus, you can purchase Arabian Food and Dairy Factories' shares before the 10th of September in order to receive the dividend, which the company will pay on the 5th of October.

The company's upcoming dividend is ر.س1.50 a share, following on from the last 12 months, when the company distributed a total of ر.س3.00 per share to shareholders. Last year's total dividend payments show that Arabian Food and Dairy Factories has a trailing yield of 4.9% on the current share price of ر.س61.50. If you buy this business for its dividend, you should have an idea of whether Arabian Food and Dairy Factories's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Arabian Food and Dairy Factories is paying out just 17% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. A useful secondary check can be to evaluate whether Arabian Food and Dairy Factories generated enough free cash flow to afford its dividend. It paid out an unsustainably high 288% of its free cash flow as dividends over the past 12 months, which is worrying. It's pretty hard to pay out more than you earn, so we wonder how Arabian Food and Dairy Factories intends to continue funding this dividend, or if it could be forced to cut the payment.

While Arabian Food and Dairy Factories'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 Arabian Food and Dairy Factories to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Check out our latest analysis for Arabian Food and Dairy Factories

Click here to see how much of its profit Arabian Food and Dairy Factories paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's not ideal to see Arabian Food and Dairy Factories's earnings per share have been shrinking at 4.6% a year over the previous five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Arabian Food and Dairy Factories has delivered 24% dividend growth per year on average over the past three years.

Final Takeaway

Should investors buy Arabian Food and Dairy Factories for the upcoming dividend? It's disappointing to see earnings per share declining, and this would ordinarily be enough to discourage us from most dividend stocks, even though Arabian Food and Dairy Factories is paying out less than half its income as dividends. However, it's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

So if you're still interested in Arabian Food and Dairy Factories despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example, we've found 4 warning signs for Arabian Food and Dairy Factories (1 shouldn't be ignored!) that deserve your attention before investing in the shares.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.