Yahoo Finance We Wouldn't Be Too Quick To Buy ARC Resources Ltd. (TSE:ARX) Before It Goes Ex-Dividend
Readers hoping to buy ARC Resources Ltd. (TSE:ARX) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. This means that investors who purchase shares on or after the 29th of September will not receive the dividend, which will be paid on the 15th of October.
ARC Resources's next dividend payment will be CA$0.06 per share, and in the last 12 months, the company paid a total of CA$0.24 per share. Last year's total dividend payments show that ARC Resources has a trailing yield of 3.9% on the current share price of CA$6.18. If you buy this business for its dividend, you should have an idea of whether ARC Resources's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
See our latest analysis for ARC Resources
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. ARC Resources paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. 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. ARC Resources paid out more free cash flow than it generated - 190%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. ARC Resources 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. ARC Resources has seen its dividend decline 15% per annum on average over the past 10 years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.
Get our latest analysis on ARC Resources's balance sheet health here.
To Sum It Up
Is ARC Resources worth buying for its dividend? First, it's not great to see the company paying a dividend despite being loss-making over the last year. Second, the dividend was not well covered by cash flow." With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of ARC Resources.
Although, if you're still interested in ARC Resources and want to know more, you'll find it very useful to know what risks this stock faces. For example, we've found 2 warning signs for ARC Resources that we recommend you consider before investing in the business.
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.
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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