Four Seas Mercantile Holdings Limited (HKG:374) stock is about to trade ex-dividend in 3 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Therefore, if you purchase Four Seas Mercantile Holdings' shares on or after the 13th of December, you won't be eligible to receive the dividend, when it is paid on the 17th of January.

The company's upcoming dividend is HK$0.03 a share, following on from the last 12 months, when the company distributed a total of HK$0.095 per share to shareholders. Last year's total dividend payments show that Four Seas Mercantile Holdings has a trailing yield of 3.8% on the current share price of HK$2.50. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Four Seas Mercantile Holdings paid out 147% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out 13% of its free cash flow as dividends last year, which is conservatively low.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Four Seas Mercantile Holdings fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see how much of its profit Four Seas Mercantile Holdings paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's not ideal to see Four Seas Mercantile Holdings's earnings per share have been shrinking at 3.8% a year over the previous five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Four Seas Mercantile Holdings has increased its dividend at approximately 1.7% a year on average.

The Bottom Line

Should investors buy Four Seas Mercantile Holdings for the upcoming dividend? It's never great to see earnings per share declining, especially when a company is paying out 147% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Four Seas Mercantile Holdings's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not that we think Four Seas Mercantile Holdings is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Four Seas Mercantile Holdings. Our analysis shows 2 warning signs for Four Seas Mercantile Holdings and you should be aware of them before buying any shares.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.