Readers hoping to buy Fairwood Holdings Limited (HKG:52) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Accordingly, Fairwood Holdings investors that purchase the stock on or after the 13th of September will not receive the dividend, which will be paid on the 3rd of October.

The company's upcoming dividend is HK$0.30 a share, following on from the last 12 months, when the company distributed a total of HK$0.41 per share to shareholders. Looking at the last 12 months of distributions, Fairwood Holdings has a trailing yield of approximately 5.8% on its current stock price of HK$7.13. If you buy this business for its dividend, you should have an idea of whether Fairwood Holdings's dividend is reliable and sustainable. As a result, readers should always check whether Fairwood Holdings has been able to grow its dividends, or if the dividend might be cut.

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Fairwood Holdings paid out 105% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. A useful secondary check can be to evaluate whether Fairwood Holdings generated enough free cash flow to afford its dividend. The good news is it paid out just 12% of its free cash flow in the last year.

It's good to see that while Fairwood Holdings's dividends were not covered by profits, at least they are affordable from a cash perspective. 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 Fairwood Holdings paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Fairwood Holdings's earnings per share have fallen at approximately 23% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Fairwood Holdings has seen its dividend decline 4.1% per annum on average over the past 10 years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

The Bottom Line

Has Fairwood Holdings got what it takes to maintain its dividend payments? It's never great to see earnings per share declining, especially when a company is paying out 105% 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 Fairwood Holdings's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that in mind though, if the poor dividend characteristics of Fairwood Holdings don't faze you, it's worth being mindful of the risks involved with this business. For example, we've found 3 warning signs for Fairwood Holdings (1 is potentially serious!) that deserve your attention before investing in the 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.

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