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Don’t rush to buy Baazeem Trading Company (TADAWUL:4051) just because it goes ex-dividend

Regular readers will know we love our dividends at Simply Wall St, which is why it’s exciting to see Baazeem trading company (TADAWUL:4051) is set to trade ex-dividend in the next 3 days. The ex-dividend date occurs one day before the record date which is the day shareholders must be on the books of the company to receive a dividend. The ex-dividend date is important because each time a stock is bought or sold, the transaction takes at least two business days to settle. Thus, you can buy shares of Baazeem Trading before August 17 in order to receive the dividend, which the company will pay on January 1.

The company’s next dividend payment will be £0.70 per share. Last year, in total, the company distributed £1.75 to shareholders. Calculating the value of last year’s payouts shows that Baazeem Trading has a return of 2.3% on the current share price of SAR 77.3. Dividends contribute greatly to investment returns for long-term holders, but only if the dividend continues to be paid. We therefore need to check whether dividend payments are covered and whether profits are increasing.

Check out our latest analysis for Baazeem Trading

Dividends are usually paid out of company profits, so if a company pays out more than it has earned, its dividend is usually at risk of being reduced. Its dividend payout ratio is 86% of earnings, meaning the company pays out the majority of its earnings. The relatively limited reinvestment of earnings could slow the rate of future earnings growth. We would be concerned about the risk of a drop in income. A useful secondary check may be to assess whether Baazeem Trading has generated enough free cash flow to pay its dividend. It has paid out an unsustainable 263% of its free cash flow in dividends over the past 12 months, which is worrying. Unless there is something about the business that we don’t understand, it could signal a risk that the dividend may need to be reduced in the future.

Baazeem Trading paid less dividends than it reported profits, but unfortunately it did not generate enough cash to cover the dividend. Cash is king, as they say, and if Baazeem Trading repeatedly pays dividends that are not well covered by cash flow, we would consider this a warning sign.

Click here to see how much profit Baazeem Trading has paid out in the last 12 months.

SASE:4051 Historic Dividend August 13, 2022

Have earnings and dividends increased?

When earnings decline, dividend companies become much more difficult to analyze and to own safely. If business goes into a recession and the dividend is cut, the company could see its value drop precipitously. Baazeem Trading’s earnings per share have fallen about 9.1% annually over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid out shrinks.

Many investors will gauge a company’s dividend yield by evaluating how much dividend payouts have changed over time. Since our data began five years ago, Baazeem Trading has increased its dividend by around 0.6% per year on average.

Last takeaway

Is Baazeem Trading an attractive dividend stock, or is it better to leave it on the shelf? Baazeem Trading had an average payout ratio, but its free cash flow was lower and earnings per share declined. It’s not that we think Baazeem Trading is a bad company, but these characteristics don’t usually lead to outstanding dividend performance.

However, if you are still interested in Baazeem Trading and want to learn more, it will be very useful for you to know what risks this security faces. For example, Baazeem Trading has 3 warning signs (and 1 of concern) that we think you should know about.

A common investment mistake is to buy the first good stock you see. Here you can find a complete list of high yielding dividend stocks.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.