It Might Not Be A Great Idea To Buy Aramark (NYSE:ARMK) For Its Next Dividend

By
Simply Wall St
Published
November 24, 2021
NYSE:ARMK
Source: Shutterstock

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Aramark (NYSE:ARMK) is about to go ex-dividend in just 4 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible 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. Accordingly, Aramark investors that purchase the stock on or after the 29th of November will not receive the dividend, which will be paid on the 7th of December.

The company's upcoming dividend is US$0.11 a share, following on from the last 12 months, when the company distributed a total of US$0.44 per share to shareholders. Based on the last year's worth of payments, Aramark has a trailing yield of 1.2% on the current stock price of $36.4. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Aramark can afford its dividend, and if the dividend could grow.

View our latest analysis for Aramark

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. Aramark lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Fortunately, it paid out only 40% of its free cash flow in the past year.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

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NYSE:ARMK Historic Dividend November 24th 2021

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. Aramark was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Aramark has delivered 4.9% dividend growth per year on average over the past eight years.

We update our analysis on Aramark every 24 hours, so you can always get the latest insights on its financial health, here.

To Sum It Up

Is Aramark worth buying for its dividend? It's hard to get used to Aramark paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that being said, if you're still considering Aramark as an investment, you'll find it beneficial to know what risks this stock is facing. For example - Aramark has 1 warning sign we think you should be aware of.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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