Don't Buy Four Seas Mercantile Holdings Limited (HKG:374) For Its Next Dividend Without Doing These Checks

Four Seas Mercantile Holdings Limited (HKG:374) stock is about to trade ex-dividend in 4 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a 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 Four Seas Mercantile Holdings' shares before the 13th of December in order to receive the dividend, which the company will pay on the 18th of January.

The company's next dividend payment will be HK$0.03 per share, on the back of last year when the company paid a total of HK$0.095 to shareholders. Looking at the last 12 months of distributions, Four Seas Mercantile Holdings has a trailing yield of approximately 3.8% on its current stock price of HK$2.5. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Four Seas Mercantile 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. An unusually high payout ratio of 289% of its profit suggests something is happening other than the usual distribution of profits to shareholders. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. What's good is that dividends were well covered by free cash flow, with the company paying out 14% of its cash flow last year.

It's good to see that while Four Seas Mercantile 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 Four Seas Mercantile 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 fall far enough, the company could be forced to cut its dividend. Four Seas Mercantile Holdings's earnings per share have plummeted approximately 48% a year over the previous five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Four Seas Mercantile Holdings has increased its dividend at approximately 3.1% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Four Seas Mercantile Holdings is already paying out 289% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Is Four Seas Mercantile Holdings an attractive dividend stock, or better left on the shelf? It's never great to see earnings per share declining, especially when a company is paying out 289% 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 Four Seas Mercantile Holdings's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. Bottom line: Four Seas Mercantile Holdings has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Although, if you're still interested in Four Seas Mercantile Holdings and want to know more, you'll find it very useful to know what risks this stock faces. To help with this, we've discovered 3 warning signs for Four Seas Mercantile Holdings that you should be aware of before investing in their shares.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.