Don't Race Out To Buy Micro-Mechanics (Holdings) Ltd. (SGX:5DD) Just Because It's Going Ex-Dividend

Readers hoping to buy Micro-Mechanics (Holdings) Ltd. (SGX:5DD) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 15th of February, you won't be eligible to receive this dividend, when it is paid on the 25th of February.

Micro-Mechanics (Holdings)'s next dividend payment will be S$0.06 per share, and in the last 12 months, the company paid a total of S$0.14 per share. Based on the last year's worth of payments, Micro-Mechanics (Holdings) has a trailing yield of 4.0% on the current stock price of SGD3.54. 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 Micro-Mechanics (Holdings) has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Micro-Mechanics (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. Last year Micro-Mechanics (Holdings) paid out 90% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. 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. Over the last year it paid out 71% of its free cash flow as dividends, within the usual range for most companies.

It's good to see that while Micro-Mechanics (Holdings)'s dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Micro-Mechanics (Holdings), with earnings per share up 7.1% on average over the last five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Micro-Mechanics (Holdings) has delivered an average of 21% per year annual increase in its dividend, based on the past 10 years of dividend payments. 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.

The Bottom Line

Has Micro-Mechanics (Holdings) got what it takes to maintain its dividend payments? Earnings per share have not grown all that much, and the company is paying out an uncomfortably high percentage of its income. Fortunately it paid out a lower percentage of its cash flow. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Although, if you're still interested in Micro-Mechanics (Holdings) and want to know more, you'll find it very useful to know what risks this stock faces. For example, we've found 2 warning signs for Micro-Mechanics (Holdings) that we recommend you consider before investing in the business.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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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