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We Wouldn't Be Too Quick To Buy ARC Resources Ltd. (TSE:ARX) Before It Goes Ex-Dividend

Simply Wall St

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see ARC Resources Ltd. (TSE:ARX) is about to trade ex-dividend in the next 4 days. You will need to purchase shares before the 27th of September to receive the dividend, which will be paid on the 15th of October.

ARC Resources's next dividend payment will be CA$0.05 per share, on the back of last year when the company paid a total of CA$0.6 to shareholders. Last year's total dividend payments show that ARC Resources has a trailing yield of 8.8% on the current share price of CA$6.83. If you buy this business for its dividend, you should have an idea of whether ARC Resources's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for ARC Resources

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Its dividend payout ratio is 87% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth We'd be concerned if earnings began to decline. A useful secondary check can be to evaluate whether ARC Resources generated enough free cash flow to afford its dividend. It paid out an unsustainably high 234% of its free cash flow as dividends over the past 12 months, which is worrying. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.

While ARC Resources's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to ARC Resources's ability to maintain its dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

TSX:ARX Historical Dividend Yield, September 22nd 2019

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. That's why it's not ideal to see ARC Resources's earnings per share have been shrinking at 2.2% a year over the previous five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. ARC Resources's dividend payments per share have declined at 15% per year on average over the past ten years, which is uninspiring. 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.

Final Takeaway

Is ARC Resources an attractive dividend stock, or better left on the shelf? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Curious what other investors think of ARC Resources? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.