Why It Might Not Make Sense To Buy Arabian Cement Company (TADAWUL:3010) For Its Upcoming Dividend

It looks like Arabian Cement Company (TADAWUL:3010) is about to go ex-dividend in the next two days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the 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. This means that investors who purchase Arabian Cement's shares on or after the 13th of August will not receive the dividend, which will be paid on the 24th of August.

The company's next dividend payment will be ر.س0.75 per share, and in the last 12 months, the company paid a total of ر.س2.20 per share. Based on the last year's worth of payments, Arabian Cement stock has a trailing yield of around 5.9% on the current share price of SAR37. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Arabian Cement has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Arabian Cement

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Arabian Cement paid out more than half (64%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether Arabian Cement generated enough free cash flow to afford its dividend. Over the past year it paid out 169% of its free cash flow as dividends, which is uncomfortably 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.

While Arabian Cement'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 Cement 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.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. Arabian Cement's earnings per share have fallen at approximately 8.2% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Arabian Cement has seen its dividend decline 0.9% per annum on average over the past 10 years, which is not great to see.

To Sum It Up

Has Arabian Cement got what it takes to maintain its dividend payments? Arabian Cement had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that in mind though, if the poor dividend characteristics of Arabian Cement don't faze you, it's worth being mindful of the risks involved with this business. To help with this, we've discovered 1 warning sign for Arabian Cement that you should be aware of before investing in their shares.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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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.