Mainland Headwear Holdings Limited (HKG:1100) Looks Like A Good Stock, And It's Going Ex-Dividend Soon

It looks like Mainland Headwear Holdings Limited (HKG:1100) is about to go ex-dividend in the next 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 important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. This means that investors who purchase Mainland Headwear Holdings' shares on or after the 29th of May will not receive the dividend, which will be paid on the 21st of June.

The company's next dividend payment will be HK$0.06 per share. Last year, in total, the company distributed HK$0.09 to shareholders. Based on the last year's worth of payments, Mainland Headwear Holdings has a trailing yield of 5.4% on the current stock price of HK$1.67. 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 check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Mainland Headwear Holdings

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. Mainland Headwear Holdings paid out a comfortable 33% of its profit last year. A useful secondary check can be to evaluate whether Mainland Headwear Holdings generated enough free cash flow to afford its dividend. Fortunately, it paid out only 34% of its free cash flow in the past year.

It's positive to see that Mainland Headwear Holdings's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see how much of its profit Mainland Headwear Holdings paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at Mainland Headwear Holdings, with earnings per share up 9.0% on average over the last five years. The company is retaining more than half of its earnings within the business, and it has been growing earnings at a decent rate. Organisations that reinvest heavily in themselves typically get stronger over time, which can bring attractive benefits such as stronger earnings and dividends.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Mainland Headwear Holdings has delivered an average of 17% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

The Bottom Line

Has Mainland Headwear Holdings got what it takes to maintain its dividend payments? Earnings per share have been growing moderately, and Mainland Headwear Holdings is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Mainland Headwear Holdings is halfway there. There's a lot to like about Mainland Headwear Holdings, and we would prioritise taking a closer look at it.

In light of that, while Mainland Headwear Holdings has an appealing dividend, it's worth knowing the risks involved with this stock. To help with this, we've discovered 3 warning signs for Mainland Headwear Holdings that you should be aware of before investing in their shares.

If you're in the market for strong dividend payers, we recommend checking 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.