Do These 3 Checks Before Buying Fairwood Holdings Limited (HKG:52) For Its Upcoming Dividend

Fairwood Holdings Limited (HKG:52) stock is about to trade ex-dividend in 3 days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the 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. Thus, you can purchase Fairwood Holdings' shares before the 12th of December in order to receive the dividend, which the company will pay on the 31st of December.

The company's next dividend payment will be HK$0.05 per share, on the back of last year when the company paid a total of HK$0.41 to shareholders. Looking at the last 12 months of distributions, Fairwood Holdings has a trailing yield of approximately 6.3% on its current stock price of HK$6.56. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Fairwood Holdings

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fairwood Holdings distributed an unsustainably high 152% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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 disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Fairwood 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. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Fairwood Holdings's earnings per share have plummeted approximately 30% a year over the previous five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. 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.

To Sum It Up

From a dividend perspective, should investors buy or avoid Fairwood Holdings? It's never great to see earnings per share declining, especially when a company is paying out 152% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

So if you're still interested in Fairwood Holdings despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Be aware that Fairwood Holdings is showing 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

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.