Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see SABIC Agri-Nutrients Company (TADAWUL:2020) is about to trade ex-dividend in the next 2 days. 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. The ex-dividend date is important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase SABIC Agri-Nutrients' shares before the 2nd of August to receive the dividend, which will be paid on the 10th of August.

The company's upcoming dividend is ر.س3.50 a share, following on from the last 12 months, when the company distributed a total of ر.س7.00 per share to shareholders. Based on the last year's worth of payments, SABIC Agri-Nutrients has a trailing yield of 5.7% on the current stock price of ر.س122.50. 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 investigate whether SABIC Agri-Nutrients can afford its dividend, and if the dividend could grow.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. SABIC Agri-Nutrients paid out more than half (73%) of its earnings last year, which is a regular payout ratio for most companies. 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. It paid out more than half (75%) of its free cash flow in the past year, which is within an average range for most companies.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's comforting to see SABIC Agri-Nutrients's earnings have been skyrocketing, up 25% per annum for the past five years. The current payout ratio suggests a good balance between rewarding shareholders with dividends, and reinvesting in growth. With a reasonable payout ratio, profits being reinvested, and some earnings growth, SABIC Agri-Nutrients could have strong prospects for future increases to the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. SABIC Agri-Nutrients has delivered 1.6% dividend growth per year on average over the past 10 years. Earnings per share have been growing much quicker than dividends, potentially because SABIC Agri-Nutrients is keeping back more of its profits to grow the business.

The Bottom Line

Has SABIC Agri-Nutrients got what it takes to maintain its dividend payments? Higher earnings per share generally lead to higher dividends from dividend-paying stocks over the long run. That's why we're glad to see SABIC Agri-Nutrients's earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow - 73% and 75% respectively. In summary, it's hard to get excited about SABIC Agri-Nutrients from a dividend perspective.

While it's tempting to invest in SABIC Agri-Nutrients for the dividends alone, you should always be mindful of the risks involved. Be aware that SABIC Agri-Nutrients is showing 2 warning signs in our investment analysis, and 1 of those is significant...

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.