It looks like Arcos Dorados Holdings Inc. (NYSE:ARCO) is about to go ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 8th of August will not receive this dividend, which will be paid on the 14th of August.
Arcos Dorados Holdings's next dividend payment will be US$0.03 per share, on the back of last year when the company paid a total of US$0.11 to shareholders. Based on the last year's worth of payments, Arcos Dorados Holdings has a trailing yield of 1.4% on the current stock price of $8. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately Arcos Dorados Holdings's payout ratio is modest, at just 47% of profit. 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 86% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.
It's positive to see that Arcos Dorados Holdings'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?
Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're not enthused to see that Arcos Dorados Holdings's earnings per share have remained effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Arcos Dorados Holdings's dividend payments per share have declined at 9.2% per year on average over the past 8 years, which is uninspiring.
To Sum It Up
Should investors buy Arcos Dorados Holdings for the upcoming dividend? Earnings per share are down very slightly in recent times, and Arcos Dorados Holdings paid out less half its profit and more than half its cash flow as dividends, which is not the worst combination but could be better. In summary, while it has some positive characteristics, we're not inclined to race out and buy Arcos Dorados Holdings today.
Curious what other investors think of Arcos Dorados Holdings? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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