Don't Buy Advanced Petrochemical Company (TADAWUL:2330) For Its Next Dividend Without Doing These Checks

By
Simply Wall St
Published
August 17, 2021
SASE:2330
Source: Shutterstock

It looks like Advanced Petrochemical Company (TADAWUL:2330) is about to go ex-dividend in the next three days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order 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. This means that investors who purchase Advanced Petrochemical's shares on or after the 22nd of August will not receive the dividend, which will be paid on the 30th of August.

The company's next dividend payment will be ر.س0.65 per share. Last year, in total, the company distributed ر.س2.60 to shareholders. Calculating the last year's worth of payments shows that Advanced Petrochemical has a trailing yield of 3.5% on the current share price of SAR73.5. 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 Advanced Petrochemical can afford its dividend, and if the dividend could grow.

See our latest analysis for Advanced Petrochemical

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. Advanced Petrochemical paid out more than half (73%) of its earnings last year, which is a regular payout ratio for most companies. 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. Over the last year, it paid out dividends equivalent to 269% of what it generated in free cash flow, a disturbingly high percentage. Our definition of free cash flow excludes cash generated from asset sales, so since Advanced Petrochemical is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.

Advanced Petrochemical paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Advanced Petrochemical 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.

historic-dividend
SASE:2330 Historic Dividend August 18th 2021

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. 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 explains why we're not overly excited about Advanced Petrochemical's flat earnings 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. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last eight years, Advanced Petrochemical has lifted its dividend by approximately 4.0% a year on average.

The Bottom Line

Is Advanced Petrochemical worth buying for its dividend? In addition to earnings being flat, Advanced Petrochemical is paying out a reasonable percentage of its earnings as profits. However, the dividend was not well covered by free cash flow. Bottom line: Advanced Petrochemical has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Although, if you're still interested in Advanced Petrochemical and want to know more, you'll find it very useful to know what risks this stock faces. For example, we've found 2 warning signs for Advanced Petrochemical (1 is potentially serious!) that deserve your attention before investing in the shares.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

When trading stocks or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted


Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.