Readers hoping to buy ArcBest Corporation (NASDAQ:ARCB) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Ex-dividend means that investors that purchase the stock on or after the 6th of August will not receive this dividend, which will be paid on the 21st of August.
ArcBest's next dividend payment will be US$0.08 per share, on the back of last year when the company paid a total of US$0.32 to shareholders. Based on the last year's worth of payments, ArcBest stock has a trailing yield of around 1.1% on the current share price of $30.39. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. That's why it's good to see ArcBest paying out a modest 29% of its earnings. 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 paid out 8.7% of its free cash flow as dividends last year, which is conservatively low.
It's positive to see that ArcBest'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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by ArcBest's 7.9% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. ArcBest has seen its dividend decline 6.1% 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.
The Bottom Line
From a dividend perspective, should investors buy or avoid ArcBest? ArcBest has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. To summarise, ArcBest looks okay on this analysis, although it doesn't appear a stand-out opportunity.
In light of that, while ArcBest has an appealing dividend, it's worth knowing the risks involved with this stock. To help with this, we've discovered 4 warning signs for ArcBest that you should be aware of before investing in their 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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