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Read This Before Considering ARC Document Solutions, Inc. (NYSE:ARC) For Its Upcoming US$0.02 Dividend

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It looks like ARC Document Solutions, Inc. (NYSE:ARC) is about to go ex-dividend in the next four days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Meaning, you will need to purchase ARC Document Solutions' shares before the 29th of July to receive the dividend, which will be paid on the 31st of August.

The company's upcoming dividend is US$0.02 a share, following on from the last 12 months, when the company distributed a total of US$0.08 per share to shareholders. Based on the last year's worth of payments, ARC Document Solutions has a trailing yield of 3.8% on the current stock price of $2.08. 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 investigate whether ARC Document Solutions can afford its dividend, and if the dividend could grow.

Check out our latest analysis for ARC Document Solutions

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. ARC Document Solutions is paying out just 20% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. The good news is it paid out just 1.7% of its free cash flow in the last year.

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.

Click here to see how much of its profit ARC Document Solutions paid out over the last 12 months.

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. 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.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. ARC Document Solutions has delivered 41% dividend growth per year on average over the past two years.

To Sum It Up

Has ARC Document Solutions got what it takes to maintain its dividend payments? ARC Document Solutions 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. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.

While it's tempting to invest in ARC Document Solutions for the dividends alone, you should always be mindful of the risks involved. In terms of investment risks, we've identified 2 warning signs with ARC Document Solutions and understanding them should be part of your investment process.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.