Here's Why We're Wary Of Buying Metrofile Holdings' (JSE:MFL) For Its Upcoming Dividend

Metrofile Holdings Limited (JSE:MFL) is about to trade ex-dividend in the next four days. The ex-dividend date is usually set to be one business day 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. 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. Thus, you can purchase Metrofile Holdings' shares before the 2nd of October in order to receive the dividend, which the company will pay on the 7th of October.

The company's next dividend payment will be R00.07 per share. Last year, in total, the company distributed R0.14 to shareholders. Based on the last year's worth of payments, Metrofile Holdings stock has a trailing yield of around 6.0% on the current share price of R02.33. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for Metrofile Holdings

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Metrofile Holdings paid out a disturbingly high 356% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. A useful secondary check can be to evaluate whether Metrofile Holdings generated enough free cash flow to afford its dividend. Fortunately, it paid out only 45% of its free cash flow in the past year.

It's good to see that while Metrofile Holdings's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit Metrofile 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 earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Metrofile Holdings's earnings per share have fallen at approximately 15% a year over the previous 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. Metrofile Holdings's dividend payments are broadly unchanged compared to where they were 10 years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.

Final Takeaway

Should investors buy Metrofile Holdings for the upcoming dividend? It's not a great combination to see a company with earnings in decline and paying out 356% of its profits, which could imply the dividend may be at risk of being cut in the future. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

So if you're still interested in Metrofile Holdings despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. We've identified 6 warning signs with Metrofile Holdings (at least 1 which shouldn't be ignored), and understanding these should be part of your investment process.

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.