Readers hoping to buy Automated Systems Holdings Limited (HKG:771) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled 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. In other words, investors can purchase Automated Systems Holdings' shares before the 31st of May in order to be eligible for the dividend, which will be paid on the 21st of June.

The company's next dividend payment will be HK$0.03 per share. Last year, in total, the company distributed HK$0.03 to shareholders. Looking at the last 12 months of distributions, Automated Systems Holdings has a trailing yield of approximately 4.0% on its current stock price of HK$0.75. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Automated Systems Holdings has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Automated Systems Holdings

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. Automated Systems Holdings has a low and conservative payout ratio of just 25% of its income after tax. A useful secondary check can be to evaluate whether Automated Systems Holdings generated enough free cash flow to afford its dividend. Dividends consumed 73% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's positive to see that Automated Systems Holdings'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.

Click here to see how much of its profit Automated Systems Holdings paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. For this reason, we're glad to see Automated Systems Holdings's earnings per share have risen 10% per annum over the last five years. Automated Systems Holdings is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. Given the quick rate of earnings per share growth and current level of payout, there may be a chance of further dividend increases in the future.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Automated Systems Holdings has seen its dividend decline 1.4% per annum on average over the past 10 years, which is not great to see.

To Sum It Up

From a dividend perspective, should investors buy or avoid Automated Systems Holdings? Earnings per share have grown at a nice rate in recent times and over the last year, Automated Systems Holdings paid out less than half its earnings and a bit over half its free cash flow. Overall we think this is an attractive combination and worthy of further research.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. We've identified 4 warning signs with Automated Systems Holdings (at least 1 which can't be ignored), and understanding these should be part of your investment process.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.