Readers hoping to buy Al-Modawat Specialized Medical Company (TADAWUL:9594) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is commonly two business days 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. This means that investors who purchase Al-Modawat Specialized Medical's shares on or after the 13th of May will not receive the dividend, which will be paid on the 7th of June.

The company's next dividend payment will be ر.س0.01 per share, on the back of last year when the company paid a total of ر.س0.12 to shareholders. Last year's total dividend payments show that Al-Modawat Specialized Medical has a trailing yield of 2.4% on the current share price of ر.س4.97. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Al-Modawat Specialized Medical paid out a comfortable 38% of its profit last year. 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. Over the past year it paid out 152% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Al-Modawat Specialized Medical paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Al-Modawat Specialized Medical's ability to maintain its dividend.

Click here to see how much of its profit Al-Modawat Specialized Medical paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. For this reason, we're glad to see Al-Modawat Specialized Medical's earnings per share have risen 14% per annum over the last three years. Earnings have been growing at a decent rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Al-Modawat Specialized Medical has seen its dividend decline 28% per annum on average over the past two years, which is not great to see. Al-Modawat Specialized Medical is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.

Final Takeaway

Is Al-Modawat Specialized Medical worth buying for its dividend? We like that Al-Modawat Specialized Medical has been successfully growing its earnings per share at a nice rate and reinvesting most of its profits in the business. However, we note the high cashflow payout ratio with some concern. In summary, it's hard to get excited about Al-Modawat Specialized Medical from a dividend perspective.

In light of that, while Al-Modawat Specialized Medical has an appealing dividend, it's worth knowing the risks involved with this stock. Be aware that Al-Modawat Specialized Medical is showing 4 warning signs in our investment analysis, and 2 of those are significant...

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.