Do These 3 Checks Before Buying Knowledge Tower (TADAWUL:9551) For Its Upcoming Dividend

It looks like Knowledge Tower (TADAWUL:9551) 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 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. Accordingly, Knowledge Tower investors that purchase the stock on or after the 4th of March will not receive the dividend, which will be paid on the 17th of March.

The company's next dividend payment will be ر.س0.15 per share, on the back of last year when the company paid a total of ر.س0.30 to shareholders. Based on the last year's worth of payments, Knowledge Tower stock has a trailing yield of around 4.4% on the current share price of ر.س6.89. If you buy this business for its dividend, you should have an idea of whether Knowledge Tower's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Knowledge Tower

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. Knowledge Tower paid out 120% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. 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. Thankfully its dividend payments took up just 45% of the free cash flow it generated, which is a comfortable payout ratio.

It's good to see that while Knowledge Tower's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see how much of its profit Knowledge Tower paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. As a result, it's definitely disappointing to see that earnings per share have declined 13% over the past year.

Given that Knowledge Tower has only been paying a dividend for a year, there's not much of a past history to draw insight from.

The Bottom Line

Has Knowledge Tower got what it takes to maintain its dividend payments? It's never great to see earnings per share declining, especially when a company is paying out 120% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Knowledge Tower's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not that we think Knowledge Tower is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that in mind though, if the poor dividend characteristics of Knowledge Tower don't faze you, it's worth being mindful of the risks involved with this business. In terms of investment risks, we've identified 3 warning signs with Knowledge Tower and understanding them 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.