Here's Why We're Wary Of Buying AV Concept Holdings' (HKG:595) For Its Upcoming Dividend

AV Concept Holdings Limited (HKG:595) stock is about to trade ex-dividend in four days. The ex-dividend date is usually set to be two business days 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 because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. This means that investors who purchase AV Concept Holdings' shares on or after the 9th of September will not receive the dividend, which will be paid on the 3rd of October.

The company's next dividend payment will be HK$0.01 per share, and in the last 12 months, the company paid a total of HK$0.02 per share. Based on the last year's worth of payments, AV Concept Holdings stock has a trailing yield of around 4.8% on the current share price of HK$0.42. 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! We need to see whether the dividend is covered by earnings and if it's growing.

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If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. That's why it's good to see AV Concept Holdings paying out a modest 34% of its earnings. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the past year it paid out 159% of its free cash flow as dividends, which is uncomfortably 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.

AV Concept Holdings 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 AV Concept Holdings's ability to maintain its dividend.

View our latest analysis for AV Concept Holdings

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. AV Concept Holdings's earnings per share have fallen at approximately 10% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, eight years ago, AV Concept Holdings has lifted its dividend by approximately 2.3% a year on average.

The Bottom Line

From a dividend perspective, should investors buy or avoid AV Concept Holdings? It's disappointing to see earnings per share declining, and this would ordinarily be enough to discourage us from most dividend stocks, even though AV Concept Holdings is paying out less than half its income as dividends. However, it's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that in mind though, if the poor dividend characteristics of AV Concept Holdings don't faze you, it's worth being mindful of the risks involved with this business. We've identified 4 warning signs with AV Concept Holdings (at least 1 which is potentially serious), and understanding them 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.