Winson Holdings Hong Kong Limited (HKG:6812) stock is about to trade ex-dividend in three days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Thus, you can purchase Winson Holdings Hong Kong's shares before the 4th of August in order to receive the dividend, which the company will pay on the 26th of August.

The company's upcoming dividend is HK$0.015 a share, following on from the last 12 months, when the company distributed a total of HK$0.015 per share to shareholders. Based on the last year's worth of payments, Winson Holdings Hong Kong stock has a trailing yield of around 3.8% on the current share price of HK$0.39. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Winson Holdings Hong Kong

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately Winson Holdings Hong Kong's payout ratio is modest, at just 40% of profit. A useful secondary check can be to evaluate whether Winson Holdings Hong Kong generated enough free cash flow to afford its dividend. The company paid out 106% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

Winson Holdings Hong Kong 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.

Winson Holdings Hong Kong paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Winson Holdings Hong Kong's ability to maintain its dividend.

Click here to see how much of its profit Winson Holdings Hong Kong paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. For this reason, we're glad to see Winson Holdings Hong Kong's earnings per share have risen 14% per annum over the last five years. Earnings have been growing at a decent rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Winson Holdings Hong Kong's dividend payments per share have declined at 3.1% per year on average over the past four years, which is uninspiring. Winson Holdings Hong Kong is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.

Final Takeaway

Is Winson Holdings Hong Kong an attractive dividend stock, or better left on the shelf? We like that Winson Holdings Hong Kong has been successfully growing its earnings per share at a nice rate and reinvesting most of its profits in the business. However, we note the high cashflow payout ratio with some concern. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we're not all that optimistic on its dividend prospects.

On that note, you'll want to research what risks Winson Holdings Hong Kong is facing. Every company has risks, and we've spotted 3 warning signs for Winson Holdings Hong Kong you should know about.

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.