Don't Race Out To Buy Fairwood Holdings Limited (HKG:52) Just Because It's Going Ex-Dividend

Fairwood Holdings Limited (HKG:52) is about to trade ex-dividend in the next 3 days. If you purchase the stock on or after the 10th of December, you won't be eligible to receive this dividend, when it is paid on the 31st of December.

Fairwood Holdings's next dividend payment will be HK$0.30 per share, on the back of last year when the company paid a total of HK$0.73 to shareholders. Based on the last year's worth of payments, Fairwood Holdings has a trailing yield of 4.0% on the current stock price of HK$18.34. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! As a result, readers should always check whether Fairwood Holdings has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Fairwood Holdings

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Fairwood Holdings distributed an unsustainably high 151% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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 distributed 26% of its free cash flow as dividends, a comfortable payout level for most companies.

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. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. 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?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. Fairwood Holdings's earnings per share have fallen at approximately 14% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Fairwood Holdings has lifted its dividend by approximately 4.7% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Fairwood Holdings is already paying out 151% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

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 151% 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. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

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 Fairwood Holdings. To help with this, we've discovered 4 warning signs for Fairwood Holdings that you should be aware of before investing in their shares.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

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This article by Simply Wall St is general in nature. 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.
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