Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Micro-Mechanics (Holdings) Ltd. (SGX:5DD) is about to go ex-dividend in just 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. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase Micro-Mechanics (Holdings)'s shares before the 5th of February to receive the dividend, which will be paid on the 19th of February.
The company's upcoming dividend is S$0.03 a share, following on from the last 12 months, when the company distributed a total of S$0.06 per share to shareholders. Based on the last year's worth of payments, Micro-Mechanics (Holdings) has a trailing yield of 3.4% on the current stock price of S$1.75. If you buy this business for its dividend, you should have an idea of whether Micro-Mechanics (Holdings)'s dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
See our latest analysis for Micro-Mechanics (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. Last year Micro-Mechanics (Holdings) paid out 108% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. A useful secondary check can be to evaluate whether Micro-Mechanics (Holdings) generated enough free cash flow to afford its dividend. Micro-Mechanics (Holdings) paid out more free cash flow than it generated - 149%, 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.
As Micro-Mechanics (Holdings)'s dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.
Click here to see how much of its profit Micro-Mechanics (Holdings) paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see Micro-Mechanics (Holdings)'s earnings per share have dropped 15% a year over 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. Micro-Mechanics (Holdings) has delivered an average of 7.2% per year annual increase in its dividend, based on the past 10 years of dividend payments. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Micro-Mechanics (Holdings) is already paying out 108% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
Final Takeaway
Is Micro-Mechanics (Holdings) worth buying for its dividend? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (108%) and cash flow as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.
With that in mind though, if the poor dividend characteristics of Micro-Mechanics (Holdings) don't faze you, it's worth being mindful of the risks involved with this business. For example, we've found 3 warning signs for Micro-Mechanics (Holdings) (1 is potentially serious!) that deserve your attention before investing in the shares.
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.