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Argan, Inc. (NYSE:AGX) stock is about to trade ex-dividend in three days. Ex-dividend means that investors that purchase the stock on or after the 22nd of July will not receive this dividend, which will be paid on the 31st of July.

Argan's next dividend payment will be US$1.25 per share, which looks like a nice increase on last year, when the company distributed a total of US$1.00 to shareholders. 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.

Check out our latest analysis for Argan

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Argan's dividend is not well covered by earnings, as the company lost money last year. This is not a sustainable state of affairs, so it would be worth investigating if earnings are expected to recover. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If Argan didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Luckily it paid out just 13% of its free cash flow last year.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Argan reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Argan has delivered 6.6% dividend growth per year on average over the past eight years.

Remember, you can always get a snapshot of Argan's financial health, by checking our visualisation of its financial health, here.

Final Takeaway

From a dividend perspective, should investors buy or avoid Argan? First, it's not great to see the company paying a dividend despite being loss-making over the last year. On the plus side, the dividend was covered by free cash flow." Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.