Don't Buy Southern Province Cement Company (TADAWUL:3050) For Its Next Dividend Without Doing These Checks

It looks like Southern Province Cement Company (TADAWUL:3050) is about to go ex-dividend in the next 3 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Accordingly, Southern Province Cement investors that purchase the stock on or after the 31st of May will not receive the dividend, which will be paid on the 11th of June.

The company's next dividend payment will be ر.س0.50 per share. Last year, in total, the company distributed ر.س1.50 to shareholders. Based on the last year's worth of payments, Southern Province Cement has a trailing yield of 1.9% on the current stock price of SAR53.1. 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 check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Southern Province Cement

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. Southern Province Cement is paying out an acceptable 58% of its profit, a common payout level among 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. Southern Province Cement paid out more free cash flow than it generated - 163%, to be precise - last year, which we think is concerningly 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.

Southern Province Cement paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Southern Province Cement's ability to maintain its dividend.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's not ideal to see Southern Province Cement's earnings per share have been shrinking at 4.1% a year over the previous five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Southern Province Cement's dividend payments per share have declined at 16% per year on average over the past 10 years, which is uninspiring. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

To Sum It Up

Has Southern Province Cement got what it takes to maintain its dividend payments? Southern Province Cement had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not that we think Southern Province Cement is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that being said, if you're still considering Southern Province Cement as an investment, you'll find it beneficial to know what risks this stock is facing. To help with this, we've discovered 1 warning sign for Southern Province 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.