Here's Why We're Wary Of Buying United Wire Factories' (TADAWUL:1301) For Its Upcoming Dividend

United Wire Factories Company (TADAWUL:1301) is about to trade ex-dividend in the next two days. The ex-dividend date generally occurs two days before the record date, which is the day on which shareholders need to be on the company's books in order to receive a 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. Therefore, if you purchase United Wire Factories' shares on or after the 16th of November, you won't be eligible to receive the dividend, when it is paid on the 30th of November.

The company's next dividend payment will be ر.س1.00 per share, on the back of last year when the company paid a total of ر.س0.50 to shareholders. Based on the last year's worth of payments, United Wire Factories has a trailing yield of 2.7% on the current stock price of ر.س18.84. 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.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

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. United Wire Factories paid out 75% of its earnings to investors last year, a normal payout level for most businesses. 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 66% of its free cash flow as dividends, within the usual range for most companies.

It's positive to see that United Wire Factories's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

See our latest analysis for United Wire Factories

Click here to see how much of its profit United Wire Factories paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see United Wire Factories's earnings per share have dropped 15% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. United Wire Factories's dividend payments per share have declined at 12% per year on average over the past 10 years, which is uninspiring. 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.

The Bottom Line

Has United Wire Factories got what it takes to maintain its dividend payments? While earnings per share are shrinking, it's encouraging to see that at least United Wire Factories's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. It's not that we think United Wire Factories is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in United Wire Factories despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. In terms of investment risks, we've identified 1 warning sign with United Wire Factories and understanding them should be part of your investment process.

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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