Do These 3 Checks Before Buying Archrock, Inc. (NYSE:AROC) For Its Upcoming Dividend

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 Archrock, Inc. (NYSE:AROC) is about to go ex-dividend in just three days. Investors can purchase shares before the 7th of August in order to be eligible for this dividend, which will be paid on the 14th of August.

Archrock's next dividend payment will be US$0.14 per share, and in the last 12 months, the company paid a total of US$0.58 per share. Looking at the last 12 months of distributions, Archrock has a trailing yield of approximately 8.7% on its current stock price of $6.66. If you buy this business for its dividend, you should have an idea of whether Archrock's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Archrock

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Archrock reported a loss last year, so it's not great to see that it has continued paying a dividend. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If Archrock 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. Archrock paid out more free cash flow than it generated - 196%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Archrock was unprofitable last year, but at least the general trend suggests its earnings have been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Archrock has seen its dividend decline 0.6% per annum on average over the past six years, which is not great to see.

Get our latest analysis on Archrock's balance sheet health here.

To Sum It Up

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

So if you're still interested in Archrock despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. In terms of investment risks, we've identified 3 warning signs with Archrock and understanding them should be part of your investment process.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.