ARC Document Solutions (NYSE:ARC) Is Paying Out A Dividend Of $0.05

ARC Document Solutions, Inc. (NYSE:ARC) will pay a dividend of $0.05 on the 30th of August. This makes the dividend yield 7.3%, which will augment investor returns quite nicely.

Check out our latest analysis for ARC Document Solutions

ARC Document Solutions Doesn't Earn Enough To Cover Its Payments

A big dividend yield for a few years doesn't mean much if it can't be sustained. The last payment made up 73% of earnings, but cash flows were much higher. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.

Over the next year, EPS is forecast to expand by 23.8%. Assuming the dividend continues along recent trends, we think the payout ratio could reach 119%, which probably can't continue without putting some pressure on the balance sheet.

ARC Document Solutions' Dividend Has Lacked Consistency

Even in its short history, we have seen the dividend cut. Since 2020, the annual payment back then was $0.04, compared to the most recent full-year payment of $0.20. This implies that the company grew its distributions at a yearly rate of about 50% over that duration. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

Dividend Growth May Be Hard To Achieve

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 hasn't seen much change in its earnings per share over the last five years. ARC Document Solutions' earnings per share has barely grown, which is not ideal - perhaps this is why the company pays out the majority of its earnings to shareholders. When the rate of return on reinvestment opportunities falls below a certain minimum level, companies often elect to pay a larger dividend instead. This is why many mature companies often have larger dividend yields.

In Summary

Overall, we think ARC Document Solutions is a solid choice as a dividend stock, even though the dividend wasn't raised this year. While the payout ratios are a good sign, we are less enthusiastic about the company's dividend record. Taking all of this into consideration, the dividend looks viable moving forward, but investors should be mindful that the company has pushed the boundaries of sustainability in the past and may do so again.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 1 warning sign for ARC Document Solutions that investors need to be conscious of moving forward. 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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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.