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Don't Race Out To Buy Four Seas Mercantile Holdings Limited (HKG:374) Just Because It's Going Ex-Dividend

Simply Wall St

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Four Seas Mercantile Holdings Limited (HKG:374) is about to trade ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 2nd of September will not receive this dividend, which will be paid on the 25th of September.

Four Seas Mercantile Holdings's next dividend payment will be HK$0.065 per share. Last year, in total, the company distributed HK$0.095 to shareholders. Based on the last year's worth of payments, Four Seas Mercantile Holdings has a trailing yield of 2.9% on the current stock price of HK$3.25. 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! As a result, readers should always check whether Four Seas Mercantile Holdings has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Four Seas Mercantile Holdings

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Four Seas Mercantile Holdings distributed an unsustainably high 121% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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 an unsustainably high 294% of its free cash flow as dividends over the past 12 months, which is worrying. It's pretty hard to pay out more than you earn, so we wonder how Four Seas Mercantile Holdings intends to continue funding this dividend, or if it could be forced to the payment.

Cash is slightly more important than profit from a dividend perspective, but given Four Seas Mercantile Holdings'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 Four Seas Mercantile Holdings paid out over the last 12 months.

SEHK:374 Historical Dividend Yield, August 28th 2019

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. With that in mind, we're discomforted by Four Seas Mercantile Holdings's 28% 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. In the past 10 years, Four Seas Mercantile Holdings has increased its dividend at approximately 3.1% a year on average. 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. Four Seas Mercantile Holdings is already paying out 121% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

The Bottom Line

Has Four Seas Mercantile Holdings got what it takes to maintain its dividend payments? Not only are earnings per share declining, but Four Seas Mercantile Holdings is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a clearly suboptimal combination that usually suggests the dividend is at risk of being cut. If not now, then perhaps in the future. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Curious about whether Four Seas Mercantile Holdings has been able to consistently generate growth? Here's a chart of its historical revenue and earnings growth.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.