It looks like Arabian Cement Company (TADAWUL:3010) is about to go ex-dividend in the next 3 days. The ex-dividend date is usually set to be two business days before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. 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. Thus, you can purchase Arabian Cement's shares before the 17th of August in order to receive the dividend, which the company will pay on the 30th of August.

The company's upcoming dividend is ر.س0.50 a share, following on from the last 12 months, when the company distributed a total of ر.س1.50 per share to shareholders. Looking at the last 12 months of distributions, Arabian Cement has a trailing yield of approximately 6.8% on its current stock price of ر.س22.20. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Arabian Cement paid out 73% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Arabian Cement generated enough free cash flow to afford its dividend. Over the past year it paid out 134% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Arabian Cement 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 Arabian Cement's ability to maintain its dividend.

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at Arabian Cement, with earnings per share up 2.0% on average over the last five years. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Arabian Cement's dividend payments per share have declined at 10% per year on average over the past 10 years, which is uninspiring. Arabian Cement 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.

The Bottom Line

Is Arabian Cement worth buying for its dividend? Arabian Cement is paying out a reasonable percentage of its income and an uncomfortably high 134% of its cash flow as dividends. At least earnings per share have been growing steadily. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Arabian Cement.

So if you're still interested in Arabian Cement despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock.

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.