We Wouldn't Be Too Quick To Buy Tung Ho Textile Co., Ltd. (TWSE:1414) Before It Goes Ex-Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Tung Ho Textile Co., Ltd. (TWSE:1414) is about to trade ex-dividend in the next 4 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. 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 Tung Ho Textile's shares before the 8th of April in order to receive the dividend, which the company will pay on the 3rd of May.

The company's next dividend payment will be NT$0.25 per share, on the back of last year when the company paid a total of NT$0.25 to shareholders. Based on the last year's worth of payments, Tung Ho Textile stock has a trailing yield of around 1.3% on the current share price of NT$19.40. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Tung Ho Textile

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. Tung Ho Textile distributed an unsustainably high 167% 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. Tung Ho Textile paid out more free cash flow than it generated - 160%, to be precise - last year, which we think is concerningly 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.

Cash is slightly more important than profit from a dividend perspective, but given Tung Ho Textile's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

Click here to see how much of its profit Tung Ho Textile paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. So we're not too excited that Tung Ho Textile's earnings are down 3.1% a year over the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Tung Ho Textile has seen its dividend decline 4.1% per annum on average over the past 10 years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

Final Takeaway

Should investors buy Tung Ho Textile for the upcoming dividend? Not only are earnings per share declining, but Tung Ho Textile is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Tung Ho Textile.

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 Tung Ho Textile. For example - Tung Ho Textile has 2 warning signs we think you should be aware of.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.