Why It Might Not Make Sense To Buy Eastern Province Cement Company (TADAWUL:3080) For Its Upcoming Dividend

Readers hoping to buy Eastern Province Cement Company (TADAWUL:3080) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date generally occurs two days 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 of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. Therefore, if you purchase Eastern Province Cement's shares on or after the 21st of April, you won't be eligible to receive the dividend, when it is paid on the 8th of May.

The company's next dividend payment will be ر.س1.00 per share, and in the last 12 months, the company paid a total of ر.س1.60 per share. Looking at the last 12 months of distributions, Eastern Province Cement has a trailing yield of approximately 4.5% on its current stock price of ر.س35.30. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Eastern Province Cement has been able to grow its dividends, or if the dividend might be cut.

We've discovered 2 warning signs about Eastern Province Cement. View them for free.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Eastern Province Cement paid out more than half (56%) 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. Eastern Province Cement paid out more free cash flow than it generated - 111%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Eastern Province Cement does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

While Eastern Province 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. Were this to happen repeatedly, this would be a risk to Eastern Province Cement's ability to maintain its dividend.

Check out our latest analysis for Eastern Province Cement

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

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 Eastern Province Cement earnings per share are up 6.5% per annum over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Eastern Province Cement's dividend payments per share have declined at 4.4% per year on average over the past 10 years, which is uninspiring. It's unusual to see earnings per share increasing at the same time as dividends per share have been in decline. We'd hope it's because the company is reinvesting heavily in its business, but it could also suggest business is lumpy.

Final Takeaway

Has Eastern Province Cement got what it takes to maintain its dividend payments? Earnings per share have grown somewhat, although Eastern Province Cement paid out over half its profits and the dividend was not well covered by free cash flow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that in mind though, if the poor dividend characteristics of Eastern Province Cement don't faze you, it's worth being mindful of the risks involved with this business. For example, we've found 2 warning signs for Eastern Province Cement (1 shouldn't be ignored!) that deserve your attention before investing in the shares.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.