Don't Race Out To Buy Tradelink Electronic Commerce Limited (HKG:536) Just Because It's Going Ex-Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Tradelink Electronic Commerce Limited (HKG:536) is about to trade ex-dividend in the next 3 days. 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. 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. Accordingly, Tradelink Electronic Commerce investors that purchase the stock on or after the 21st of September will not receive the dividend, which will be paid on the 6th of October.

The company's next dividend payment will be HK$0.037 per share, on the back of last year when the company paid a total of HK$0.084 to shareholders. Calculating the last year's worth of payments shows that Tradelink Electronic Commerce has a trailing yield of 8.9% on the current share price of HK$0.94. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Tradelink Electronic Commerce can afford its dividend, and if the dividend could grow.

View our latest analysis for Tradelink Electronic Commerce

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. It paid out 87% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. It could become a concern if earnings started to decline. 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. Over the past year it paid out 119% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Tradelink Electronic Commerce does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

While Tradelink Electronic Commerce's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Tradelink Electronic Commerce to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see how much of its profit Tradelink Electronic Commerce paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're not enthused to see that Tradelink Electronic Commerce's earnings per share have remained effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Tradelink Electronic Commerce's dividend payments per share have declined at 2.0% per year on average over the past 10 years, which is uninspiring.

The Bottom Line

Is Tradelink Electronic Commerce an attractive dividend stock, or better left on the shelf? In addition to earnings being flat, Tradelink Electronic Commerce is paying out a reasonable percentage of its earnings as profits. However, the dividend was not well covered by free cash flow. Bottom line: Tradelink Electronic Commerce has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of Tradelink Electronic Commerce don't faze you, it's worth being mindful of the risks involved with this business. Our analysis shows 3 warning signs for Tradelink Electronic Commerce that we strongly recommend you have a look at before investing in the company.

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.