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

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Micro-Mechanics (Holdings) Ltd. (SGX:5DD) is about to go ex-dividend in just 2 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Accordingly, Micro-Mechanics (Holdings) investors that purchase the stock on or after the 7th of November will not receive the dividend, which will be paid on the 18th of November.

The company's upcoming dividend is S$0.03 a share, following on from the last 12 months, when the company distributed a total of S$0.06 per share to shareholders. Looking at the last 12 months of distributions, Micro-Mechanics (Holdings) has a trailing yield of approximately 3.6% on its current stock price of S$1.67. 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 investigate whether Micro-Mechanics (Holdings) can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Micro-Mechanics (Holdings)

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. Micro-Mechanics (Holdings) paid out 99% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. 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. It paid out more than half (68%) of its free cash flow in the past year, which is within an average 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 this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

Click here to see how much of its profit Micro-Mechanics (Holdings) paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by Micro-Mechanics (Holdings)'s 8.3% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Micro-Mechanics (Holdings) has delivered an average of 7.2% per year annual increase in its dividend, based on the past 10 years of dividend payments. 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. Micro-Mechanics (Holdings) is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

To Sum It Up

Is Micro-Mechanics (Holdings) worth buying for its dividend? Earnings per share have been shrinking in recent times. Worse, Micro-Mechanics (Holdings)'s paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

So if you're still interested in Micro-Mechanics (Holdings) despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. We've identified 2 warning signs with Micro-Mechanics (Holdings) (at least 1 which can't be ignored), and understanding them should be part of your investment process.

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.