Why It Might Not Make Sense To Buy Saudi Basic Industries Corporation (TADAWUL:2010) For Its Upcoming Dividend

Saudi Basic Industries Corporation (TADAWUL:2010) is about to trade 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 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. Meaning, you will need to purchase Saudi Basic Industries' shares before the 13th of February to receive the dividend, which will be paid on the 4th of March.

The company's upcoming dividend is ر.س1.60 a share, following on from the last 12 months, when the company distributed a total of ر.س3.60 per share to shareholders. Calculating the last year's worth of payments shows that Saudi Basic Industries has a trailing yield of 4.0% on the current share price of ر.س79.10. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Saudi Basic Industries can afford its dividend, and if the dividend could grow.

View our latest analysis for Saudi Basic Industries

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. An unusually high payout ratio of 292% of its profit suggests something is happening other than the usual distribution of profits to shareholders. A useful secondary check can be to evaluate whether Saudi Basic Industries generated enough free cash flow to afford its dividend. Dividends consumed 74% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's good to see that while Saudi Basic Industries's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're discomforted by Saudi Basic Industries's 27% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Saudi Basic Industries's dividend payments per share have declined at 4.4% per year on average over the past 10 years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

To Sum It Up

Is Saudi Basic Industries worth buying for its dividend? It's never fun to see a company's earnings per share in retreat. Worse, Saudi Basic Industries's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. It's not that we think Saudi Basic Industries is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that being said, if you're still considering Saudi Basic Industries as an investment, you'll find it beneficial to know what risks this stock is facing. Case in point: We've spotted 2 warning signs for Saudi Basic Industries you should be aware of.

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.