Here's Why We're Wary Of Buying Fourace Industries Group Holdings' (HKG:1455) For Its Upcoming Dividend
It looks like Fourace Industries Group Holdings Limited (HKG:1455) is about to go ex-dividend in the next three 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. 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. Meaning, you will need to purchase Fourace Industries Group Holdings' shares before the 14th of August to receive the dividend, which will be paid on the 31st of August.
The company's next dividend payment will be HK$0.015 per share. Last year, in total, the company distributed HK$0.015 to shareholders. Based on the last year's worth of payments, Fourace Industries Group Holdings has a trailing yield of 6.3% on the current stock price of HK$0.239. If you buy this business for its dividend, you should have an idea of whether Fourace Industries Group Holdings's dividend is reliable and sustainable. As a result, readers should always check whether Fourace Industries Group Holdings has been able to grow its dividends, or if the dividend might be cut.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fourace Industries Group Holdings has a low and conservative payout ratio of just 17% of its income after tax. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Fourace Industries Group Holdings paid out more free cash flow than it generated - 146%, 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.
Fourace Industries Group Holdings does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.
While Fourace Industries Group Holdings's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Fourace Industries Group Holdings's ability to maintain its dividend.
View our latest analysis for Fourace Industries Group Holdings
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. Readers will understand then, why we're concerned to see Fourace Industries Group Holdings's earnings per share have dropped 11% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Fourace Industries Group Holdings has seen its dividend decline 17% per annum on average over the past five years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.
The Bottom Line
From a dividend perspective, should investors buy or avoid Fourace Industries Group Holdings? Fourace Industries Group Holdings's earnings per share have fallen noticeably and, although it paid out less than half its profit as dividends last year, it paid out a disconcertingly high percentage of its cashflow, which is not a great combination. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.
With that being said, if you're still considering Fourace Industries Group Holdings as an investment, you'll find it beneficial to know what risks this stock is facing. For instance, we've identified 4 warning signs for Fourace Industries Group Holdings (1 is concerning) you should be aware of.
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.