Readers hoping to buy Gas Arabian Services Company (TADAWUL:4146) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. This means that investors who purchase Gas Arabian Services' shares on or after the 2nd of April will not receive the dividend, which will be paid on the 15th of April.

The company's next dividend payment will be ر.س0.30 per share, on the back of last year when the company paid a total of ر.س0.50 to shareholders. Based on the last year's worth of payments, Gas Arabian Services stock has a trailing yield of around 3.7% on the current share price of ر.س13.63. 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 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. Gas Arabian Services paid out 52% of its earnings to investors last year, a normal payout level for most businesses. 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 last year, it paid out dividends equivalent to 291% of what it generated in free cash flow, a disturbingly high percentage. Our definition of free cash flow excludes cash generated from asset sales, so since Gas Arabian Services is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.

Gas Arabian Services 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 Gas Arabian Services's ability to maintain its dividend.

Click here to see how much of its profit Gas Arabian Services 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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Fortunately for readers, Gas Arabian Services's earnings per share have been growing at 14% a year for the past five 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.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last three years, Gas Arabian Services has lifted its dividend by approximately 30% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

To Sum It Up

Is Gas Arabian Services worth buying for its dividend? Earnings per share growth is a positive, and the company's payout ratio looks normal. However, we note Gas Arabian Services paid out a much higher percentage of its free cash flow, which makes us uncomfortable. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.

If you're not too concerned about Gas Arabian Services's ability to pay dividends, you should still be mindful of some of the other risks that this business faces.

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.