Don't Race Out To Buy Archrock, Inc. (NYSE:AROC) Just Because It's Going Ex-Dividend
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 Archrock, Inc. (NYSE:AROC) 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Thus, you can purchase Archrock's shares before the 7th of November in order to receive the dividend, which the company will pay on the 15th of November.
The company's next dividend payment will be US$0.14 per share, and in the last 12 months, the company paid a total of US$0.58 per share. Looking at the last 12 months of distributions, Archrock has a trailing yield of approximately 7.6% on its current stock price of $7.6. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.
See our latest analysis for Archrock
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. An unusually high payout ratio of 274% of its profit suggests something is happening other than the usual distribution of profits to shareholders. A useful secondary check can be to evaluate whether Archrock generated enough free cash flow to afford its dividend. Over the last year, it paid out dividends equivalent to 256% of what it generated in free cash flow, a disturbingly high percentage. Our definition of free cash flow excludes cash generated from asset sales, so since Archrock is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.
As Archrock's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.
Click here to see how much of its profit Archrock paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. Fortunately for readers, Archrock's earnings per share have been growing at 14% a year for the past five years. Earnings are growing pretty quickly, which is great, but it's uncomfortably to see the company paying out 274% of earnings. We're wary of fast-growing companies flaming out by over-committing themselves financially, and consider this a yellow flag.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Archrock's dividend payments are broadly unchanged compared to where they were nine years ago.
Final Takeaway
Has Archrock got what it takes to maintain its dividend payments? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.
Although, if you're still interested in Archrock and want to know more, you'll find it very useful to know what risks this stock faces. We've identified 3 warning signs with Archrock (at least 2 which make us uncomfortable), and understanding them should be part of your investment process.
If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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