The board of Arcos Dorados Holdings Inc. (NYSE:ARCO) has announced that it will pay a dividend of $0.06 per share on the 27th of June. The dividend yield will be 2.9% based on this payment which is still above the industry average.

Arcos Dorados Holdings' Payment Could Potentially Have Solid Earnings Coverage

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Arcos Dorados Holdings is quite easily earning enough to cover the dividend, however it is being let down by weak cash flows. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.

The next year is set to see EPS grow by 29.1%. Assuming the dividend continues along recent trends, we think the payout ratio could be 26% by next year, which is in a pretty sustainable range.

View our latest analysis for Arcos Dorados Holdings

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The annual payment during the last 10 years was $0.238 in 2015, and the most recent fiscal year payment was $0.24. Dividend payments have grown at less than 1% a year over this period. The dividend has seen some fluctuations in the past, so even though the dividend was raised this year, we should remember that it has been cut in the past.

The Dividend Looks Likely To Grow

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It's encouraging to see that Arcos Dorados Holdings has been growing its earnings per share at 13% a year over the past five years. Arcos Dorados Holdings definitely has the potential to grow its dividend in the future with earnings on an uptrend and a low payout ratio.

Our Thoughts On Arcos Dorados Holdings' Dividend

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Arcos Dorados Holdings' payments, as there could be some issues with sustaining them into the future. While Arcos Dorados Holdings is earning enough to cover the payments, the cash flows are lacking. Overall, we don't think this company has the makings of a good income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 2 warning signs for Arcos Dorados Holdings that investors need to be conscious of moving forward. Is Arcos Dorados Holdings not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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