It looks like Saudi Basic Industries Corporation (TADAWUL:2010) is about to go ex-dividend in the next three days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled 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. Accordingly, Saudi Basic Industries investors that purchase the stock on or after the 12th of September will not receive the dividend, which will be paid on the 2nd of October.
The company's next dividend payment will be ر.س2.25 per share, and in the last 12 months, the company paid a total of ر.س4.50 per share. Last year's total dividend payments show that Saudi Basic Industries has a trailing yield of 4.6% on the current share price of SAR98.2. 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 investigate whether Saudi Basic Industries can afford its dividend, and if the dividend could grow.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Saudi Basic Industries paid out 54% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Saudi Basic Industries generated enough free cash flow to afford its dividend. It distributed 45% of its free cash flow as dividends, a comfortable payout level for most companies.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Saudi Basic Industries earnings per share are up 7.2% per annum over the last five years. While earnings have been growing at a credible rate, the company is paying out a majority of its earnings to shareholders. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Saudi Basic Industries's dividend payments per share have declined at 1.0% per year on average over the past 10 years, which is uninspiring.
To Sum It Up
Should investors buy Saudi Basic Industries for the upcoming dividend? Earnings per share growth has been modest and Saudi Basic Industries paid out over half of its profits and less than half of its free cash flow, although both payout ratios are within normal limits. To summarise, Saudi Basic Industries looks okay on this analysis, although it doesn't appear a stand-out opportunity.
With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. For example, we've found 1 warning sign for Saudi Basic Industries that we recommend you consider before investing in the business.
If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
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Saudi Basic Industries
Saudi Basic Industries Corporation manufactures, markets, and distributes chemicals, polymers, plastics, agri-nutrients, and metal products worldwide.
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Flawless balance sheet, undervalued and pays a dividend.