Avi-Tech Holdings Limited (SGX:1R6) is about to trade ex-dividend in the next 2 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Thus, you can purchase Avi-Tech Holdings' shares before the 7th of November in order to receive the dividend, which the company will pay on the 26th of November.

The company's next dividend payment will be S$0.0075 per share. Last year, in total, the company distributed S$0.015 to shareholders. Based on the last year's worth of payments, Avi-Tech Holdings stock has a trailing yield of around 5.9% on the current share price of S$0.255. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Avi-Tech Holdings can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Avi-Tech Holdings

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Avi-Tech Holdings paid out 91% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. 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. It distributed 37% of its free cash flow as dividends, a comfortable payout level for most companies.

It's good to see that while Avi-Tech Holdings's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

Click here to see how much of its profit Avi-Tech 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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see Avi-Tech Holdings's earnings per share have dropped 9.5% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Avi-Tech Holdings has delivered 2.3% dividend growth per year on average over the past 10 years. 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. Avi-Tech Holdings is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

To Sum It Up

Is Avi-Tech Holdings an attractive dividend stock, or better left on the shelf? It's never great to see earnings per share declining, especially when a company is paying out 91% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Avi-Tech Holdings. To that end, you should learn about the 3 warning signs we've spotted with Avi-Tech Holdings (including 1 which is a bit concerning).

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

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