Should You Buy Arabian Centres Company (TADAWUL:4321) For Its Upcoming Dividend?

Readers hoping to buy Arabian Centres Company (TADAWUL:4321) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. This means that investors who purchase Arabian Centres' shares on or after the 2nd of April will not receive the dividend, which will be paid on the 16th of April.

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.س1.87 per share. Looking at the last 12 months of distributions, Arabian Centres has a trailing yield of approximately 7.4% on its current stock price of ر.س25.40. If you buy this business for its dividend, you should have an idea of whether Arabian Centres's dividend is reliable and sustainable. So we need to investigate whether Arabian Centres can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Arabian Centres

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. It paid out 78% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be worried about the risk of a drop in earnings. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out more than half (65%) of its free cash flow in the past year, which is within an average range for most companies.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. For this reason, we're glad to see Arabian Centres's earnings per share have risen 13% per annum over the last five years. The company paid out most of its earnings as dividends over the last year, even though business is booming and earnings per share are growing rapidly. Higher earnings generally bode well for growing dividends, although with seemingly strong growth prospects we'd wonder why management are not reinvesting more in the business.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last four years, Arabian Centres has lifted its dividend by approximately 1.0% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Arabian Centres is keeping back more of its profits to grow the business.

The Bottom Line

Should investors buy Arabian Centres for the upcoming dividend? Higher earnings per share generally lead to higher dividends from dividend-paying stocks over the long run. That's why we're glad to see Arabian Centres's earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow - 78% and 65% respectively. Overall, it's hard to get excited about Arabian Centres from a dividend perspective.

While it's tempting to invest in Arabian Centres for the dividends alone, you should always be mindful of the risks involved. We've identified 4 warning signs with Arabian Centres (at least 2 which don't sit too well with us), and understanding these should be part of your investment process.

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.