Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see ARC Document Solutions, Inc. (NYSE:ARC) is about to trade ex-dividend in the next four days. The ex-dividend date occurs one day 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 important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Therefore, if you purchase ARC Document Solutions' shares on or after the 29th of July, you won't be eligible to receive the dividend, when it is paid on the 31st of August.
The company's next dividend payment will be US$0.02 per share. Last year, in total, the company distributed US$0.08 to shareholders. Based on the last year's worth of payments, ARC Document Solutions stock has a trailing yield of around 3.8% on the current share price of $2.08. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. ARC Document Solutions is paying out just 20% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. A useful secondary check can be to evaluate whether ARC Document Solutions generated enough free cash flow to afford its dividend. The good news is it paid out just 1.7% of its free cash flow in the last year.
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.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. ARC Document Solutions's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 41% a year over the past five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. ARC Document Solutions has delivered 41% dividend growth per year on average over the past two years.
The Bottom Line
Is ARC Document Solutions an attractive dividend stock, or better left on the shelf? ARC Document Solutions has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. All things considered, we are not particularly enthused about ARC Document Solutions from a dividend perspective.
So while ARC Document Solutions looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Every company has risks, and we've spotted 2 warning signs for ARC Document Solutions you should know about.
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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This article by Simply Wall St is general in nature. 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.
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