ARC Document Solutions (NYSE:ARC) Has Affirmed Its Dividend Of $0.05

ARC Document Solutions, Inc. (NYSE:ARC) has announced that it will pay a dividend of $0.05 per share on the 31st of August. This means the annual payment is 6.3% of the current stock price, which is above the average for the industry.

View our latest analysis for ARC Document Solutions

ARC Document Solutions' Payment Has Solid Earnings Coverage

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, ARC Document Solutions' dividend made up quite a large proportion of earnings but only 28% of free cash flows. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.

Looking forward, earnings per share is forecast to rise by 43.1% over the next year. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 55% which would be quite comfortable going to take the dividend forward.

ARC Document Solutions' Dividend Has Lacked Consistency

The track record isn't the longest, but we are already seeing a bit of instability in the payments. Since 2020, the dividend has gone from $0.04 total annually to $0.20. This means that it has been growing its distributions at 71% per annum over that time. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.

ARC Document Solutions' Dividend Might Lack Growth

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. ARC Document Solutions has seen EPS rising for the last five years, at 58% per annum. EPS is growing rapidly, although the company is also paying out a large portion of its profits as dividends. If earnings keep growing, the dividend may be sustainable, but generally we'd prefer to see a fast growing company reinvest in further growth.

Our Thoughts On ARC Document Solutions' Dividend

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would be a touch cautious of relying on this stock primarily for the dividend income.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 2 warning signs for ARC Document Solutions that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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