ARC Document Solutions, Inc.'s (NYSE:ARC) investors are due to receive a payment of $0.05 per share on 30th of August. This means the annual payment is 6.8% of the current stock price, which is above the average for the industry.

Check out our latest analysis for ARC Document Solutions

ARC Document Solutions Is Paying Out More Than It Is Earning

If the payments aren't sustainable, a high yield for a few years won't matter that much. Before making this announcement, ARC Document Solutions' dividend was higher than its profits, but the free cash flows quite comfortably covered it. Healthy cash flows are always a positive sign, especially when they quite easily cover the dividend.

Over the next year, EPS is forecast to expand by 23.8%. However, if the dividend continues along recent trends, it could start putting pressure on the balance sheet with the payout ratio reaching 120% over the next year.

ARC Document Solutions' Dividend Has Lacked Consistency

Even in its relatively short history, the company has reduced the dividend at least once. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. The annual payment during the last 5 years was $0.04 in 2019, and the most recent fiscal year payment was $0.20. This means that it has been growing its distributions at 38% per annum over that time. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

The Dividend's Growth Prospects Are Limited

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Although it's important to note that ARC Document Solutions' earnings per share has basically not grown from where it was five years ago, which could erode the purchasing power of the dividend over time. The company is paying out a lot of its profits, even though it is growing those profits pretty slowly. As they say in finance, 'past performance is not indicative of future performance', but we are not confident a company with limited earnings growth and a high payout ratio will be a star dividend-payer over the next decade.

In Summary

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. This company is not in the top tier of income providing stocks.