Do These 3 Checks Before Buying African Rainbow Minerals Limited (JSE:ARI) For Its Upcoming Dividend
editorial-team@simplywallst.com (Simply Wall St)
4 min read
Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that African Rainbow Minerals Limited (JSE:ARI) is about to go ex-dividend in just three days. The ex-dividend date is usually set to be one business day 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. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. This means that investors who purchase African Rainbow Minerals' shares on or after the 2nd of October will not receive the dividend, which will be paid on the 7th of October.
The company's next dividend payment will be R09.00 per share, and in the last 12 months, the company paid a total of R15.00 per share. Based on the last year's worth of payments, African Rainbow Minerals stock has a trailing yield of around 8.0% on the current share price of R0187.55. If you buy this business for its dividend, you should have an idea of whether African Rainbow Minerals's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year African Rainbow Minerals paid out 93% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the last year, it paid out dividends equivalent to 270% 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 African Rainbow Minerals 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.
African Rainbow Minerals does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.
As African Rainbow Minerals's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.
Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's not ideal to see African Rainbow Minerals's earnings per share have been shrinking at 2.8% 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. In the past 10 years, African Rainbow Minerals has increased its dividend at approximately 11% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. African Rainbow Minerals is already paying out 93% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
To Sum It Up
Should investors buy African Rainbow Minerals for the upcoming dividend? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (93%) and cash flow as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.
Although, if you're still interested in African Rainbow Minerals and want to know more, you'll find it very useful to know what risks this stock faces. Our analysis shows 3 warning signs for African Rainbow Minerals that we strongly recommend you have a look at before investing in the company.
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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.
