Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Arcos Dorados Holdings Inc. (NYSE:ARCO) is about to trade ex-dividend in the next four days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled 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. Accordingly, Arcos Dorados Holdings investors that purchase the stock on or after the 22nd of March will not receive the dividend, which will be paid on the 28th of March.
The company's next dividend payment will be US$0.06 per share. Last year, in total, the company distributed US$0.19 to shareholders. Last year's total dividend payments show that Arcos Dorados Holdings has a trailing yield of 2.1% on the current share price of US$11.35. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Arcos Dorados Holdings is paying out just 22% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. A useful secondary check can be to evaluate whether Arcos Dorados Holdings generated enough free cash flow to afford its dividend. Arcos Dorados Holdings paid out more free cash flow than it generated - 183%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.
While Arcos Dorados Holdings's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Arcos Dorados Holdings'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?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see Arcos Dorados Holdings has grown its earnings rapidly, up 37% a year for the past five years. Earnings have been growing quickly, 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. Arcos Dorados Holdings's dividend payments are effectively flat on where they were 10 years ago.
To Sum It Up
Is Arcos Dorados Holdings an attractive dividend stock, or better left on the shelf? We're glad to see the company has been improving its earnings per share while also paying out a low percentage of income. However, it's not great to see it paying out what we see as an uncomfortably high percentage of its cash flow. All things considered, we are not particularly enthused about Arcos Dorados Holdings from a dividend perspective.
With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. Every company has risks, and we've spotted 2 warning signs for Arcos Dorados Holdings you should know about.
Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.
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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.