The board of ARC Document Solutions, Inc. (NYSE:ARC) has announced that it will pay a dividend on the 30th of August, with investors receiving $0.05 per share. The dividend yield will be 7.5% based on this payment which is still above the industry average.

Check out our latest analysis for ARC Document Solutions

ARC Document Solutions Is Paying Out More Than It Is Earning

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Based on the last payment, ARC Document Solutions' profits didn't cover the dividend, but the company was generating enough cash instead. Generally, we think cash is more important than accounting measures of profit, so with the cash flows easily covering the dividend, we don't think there is much reason to worry.

The next 12 months is set to see EPS grow by 23.8%. If the dividend continues on its recent course, the payout ratio in 12 months could be 120%, which is a bit high and could start applying pressure to the balance sheet.

ARC Document Solutions' Dividend Has Lacked Consistency

Even in its short history, we have seen the dividend cut. Since 2020, the annual payment back then was $0.04, compared to the most recent full-year payment of $0.20. This means that it has been growing its distributions at 50% per annum over that time. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.

ARC Document Solutions May Find It Hard To Grow The Dividend

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Unfortunately, ARC Document Solutions' earnings per share has been essentially flat over the past five years, which means the dividend may not be increased each year. The earnings growth is anaemic, and the company is paying out 97% of its profit. This gives limited room for the company to raise the dividend in the future.

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. We would be a touch cautious of relying on this stock primarily for the dividend income.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For instance, we've picked out 1 warning sign for ARC Document Solutions that investors should take into consideration. Is ARC Document Solutions not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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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.