Why It Might Not Make Sense To Buy Aramark (NYSE:ARMK) For Its Upcoming Dividend
Aramark (NYSE:ARMK) is about to trade ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 16th of February will not receive the dividend, which will be paid on the 3rd of March.
Aramark's next dividend payment will be US$0.11 per share. Last year, in total, the company distributed US$0.44 to shareholders. Looking at the last 12 months of distributions, Aramark has a trailing yield of approximately 1.2% on its current stock price of $36.73. If you buy this business for its dividend, you should have an idea of whether Aramark's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
See our latest analysis for Aramark
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Aramark paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If Aramark didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Thankfully its dividend payments took up just 30% of the free cash flow it generated, which is a comfortable payout ratio.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
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. Aramark was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last seven years, Aramark has lifted its dividend by approximately 5.6% a year on average.
Remember, you can always get a snapshot of Aramark's financial health, by checking our visualisation of its financial health, here.
Final Takeaway
Is Aramark an attractive dividend stock, or better left on the shelf? We're a bit uncomfortable with it paying a dividend while being loss-making. However, we note that the dividend was covered by cash flow. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.
So if you're still interested in Aramark despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Every company has risks, and we've spotted 1 warning sign for Aramark you should know about.
If you're in the market for dividend stocks, we recommend checking our list of top 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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