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It looks like ARC Document Solutions, Inc. (NYSE:ARC) is about to go ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 29th of April will not receive this dividend, which will be paid on the 31st of May.
ARC Document Solutions's upcoming dividend is US$0.02 a share, following on from the last 12 months, when the company distributed a total of US$0.04 per share to shareholders. Calculating the last year's worth of payments shows that ARC Document Solutions has a trailing yield of 3.6% on the current share price of $2.25. 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.
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. ARC Document Solutions has a low and conservative payout ratio of just 14% of its income after tax. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out 1.8% of its free cash flow as dividends last year, which is conservatively low.
It's positive to see that ARC Document Solutions'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.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. 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 Document Solutions's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 41% a year over the past five years.
Unfortunately ARC Document Solutions has only been paying a dividend for a year or so, so there's not much of a history to draw insight from.
The Bottom Line
Should investors buy ARC Document Solutions for the upcoming dividend? Earnings per share are down meaningfully, although at least the company is paying out a low and conservative percentage of both its earnings and cash flow. It's definitely not great to see earnings falling, but at least there may be some buffer before the dividend needs to be cut. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.
In light of that, while ARC Document Solutions has an appealing dividend, it's worth knowing the risks involved with this stock. For example, we've found 3 warning signs for ARC Document Solutions (1 is concerning!) that deserve your attention before investing in the shares.
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.
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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