African Rainbow Minerals (JSE:ARI) Could Be A Buy For Its Upcoming Dividend

By
Simply Wall St
Published
March 19, 2021
JSE:ARI
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 African Rainbow Minerals Limited (JSE:ARI) is about to go ex-dividend in just 3 days. This means that investors who purchase shares on or after the 24th of March will not receive the dividend, which will be paid on the 29th of March.

African Rainbow Minerals's next dividend payment will be R10.00 per share, on the back of last year when the company paid a total of R12.00 to shareholders. Based on the last year's worth of payments, African Rainbow Minerals stock has a trailing yield of around 4.5% on the current share price of ZAR267.08. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for African Rainbow Minerals

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. Fortunately African Rainbow Minerals's payout ratio is modest, at just 49% of profit. A useful secondary check can be to evaluate whether African Rainbow Minerals generated enough free cash flow to afford its dividend. Fortunately, it paid out only 46% of its free cash flow in the past year.

It's positive to see that African Rainbow Minerals's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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

historic-dividend
JSE:ARI Historic Dividend March 20th 2021

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's encouraging to see African Rainbow Minerals has grown its earnings rapidly, up 135% a year for the past five years. African Rainbow Minerals is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. Companies with growing earnings and low payout ratios are often the best long-term dividend stocks, as the company can both grow its earnings and increase the percentage of earnings that it pays out, essentially multiplying the dividend.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. African Rainbow Minerals has delivered 20% dividend growth per year on average over the past 10 years. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

To Sum It Up

Has African Rainbow Minerals got what it takes to maintain its dividend payments? African Rainbow Minerals has grown its earnings per share while simultaneously reinvesting in the business. Unfortunately it's cut the dividend at least once in the past 10 years, but the conservative payout ratio makes the current dividend look sustainable. African Rainbow Minerals looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. We've identified 2 warning signs with African Rainbow Minerals (at least 1 which is potentially serious), and understanding them should be part of your investment process.

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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Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.