Dividend Investors: Don't Be Too Quick To Buy Formosa Prosonic Industries Berhad (KLSE:FPI) For Its Upcoming Dividend

Formosa Prosonic Industries Berhad (KLSE:FPI) stock is about to trade ex-dividend in four days. The ex-dividend date is usually set to be two business days 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. In other words, investors can purchase Formosa Prosonic Industries Berhad's shares before the 24th of December in order to be eligible for the dividend, which will be paid on the 16th of January.

The company's next dividend payment will be RM00.80 per share. Last year, in total, the company distributed RM0.18 to shareholders. Last year's total dividend payments show that Formosa Prosonic Industries Berhad has a trailing yield of 9.1% on the current share price of RM01.97. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Formosa Prosonic Industries Berhad has been able to grow its dividends, or if the dividend might be cut.

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Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Formosa Prosonic Industries Berhad paid out more than half (73%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether Formosa Prosonic Industries Berhad generated enough free cash flow to afford its dividend. Over the past year it paid out 134% 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.

Formosa Prosonic Industries Berhad 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.

Formosa Prosonic Industries Berhad paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Formosa Prosonic Industries Berhad's ability to maintain its dividend.

See our latest analysis for Formosa Prosonic Industries Berhad

Click here to see how much of its profit Formosa Prosonic Industries Berhad paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at Formosa Prosonic Industries Berhad, with earnings per share up 7.2% on average over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Formosa Prosonic Industries Berhad has increased its dividend at approximately 20% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

Final Takeaway

Is Formosa Prosonic Industries Berhad an attractive dividend stock, or better left on the shelf? Earnings per share have grown somewhat, although Formosa Prosonic Industries Berhad paid out over half its profits and the dividend was not well covered by free cash flow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Although, if you're still interested in Formosa Prosonic Industries Berhad and want to know more, you'll find it very useful to know what risks this stock faces. For example, we've found 3 warning signs for Formosa Prosonic Industries Berhad (1 is concerning!) that deserve your attention before investing in the shares.

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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.