Why It Might Not Make Sense To Buy Adams Resources & Energy, Inc. (NYSEMKT:AE) For Its Upcoming Dividend

By
Simply Wall St
Published
December 01, 2019
AMEX:AE

Adams Resources & Energy, Inc. (NYSEMKT:AE) stock is about to trade ex-dividend in 3 days time. This means that investors who purchase shares on or after the 5th of December will not receive the dividend, which will be paid on the 20th of December.

Adams Resources & Energy's upcoming dividend is US$0.24 a share, following on from the last 12 months, when the company distributed a total of US$0.96 per share to shareholders. Calculating the last year's worth of payments shows that Adams Resources & Energy has a trailing yield of 3.0% on the current share price of $32.14. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Adams Resources & Energy has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Adams Resources & Energy

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Adams Resources & Energy paid out a disturbingly high 228% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. 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.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Adams Resources & Energy fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit Adams Resources & Energy paid out over the last 12 months.

AMEX:AE Historical Dividend Yield, December 1st 2019
AMEX:AE Historical Dividend Yield, December 1st 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Adams Resources & Energy's earnings per share have plummeted approximately 40% a year over the previous five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past ten years, Adams Resources & Energy has increased its dividend at approximately 6.7% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Adams Resources & Energy is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

To Sum It Up

From a dividend perspective, should investors buy or avoid Adams Resources & Energy? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (228%) and cash flow (-403%) as dividends. This is a clearly suboptimal combination that usually suggests the dividend is at risk of being cut. If not now, then perhaps in the future. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Want to learn more about Adams Resources & Energy? Here's a visualisation of its historical rate of revenue and earnings growth.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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