Fad International Company (TADAWUL:9589) is about to trade ex-dividend in the next three days. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled 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. In other words, investors can purchase Fad International's shares before the 17th of June in order to be eligible for the dividend, which will be paid on the .

The company's next dividend payment will be ر.س5.00 per share, and in the last 12 months, the company paid a total of ر.س5.00 per share. Looking at the last 12 months of distributions, Fad International has a trailing yield of approximately 6.7% on its current stock price of ر.س75.00. If you buy this business for its dividend, you should have an idea of whether Fad International's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

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. Fad International distributed an unsustainably high 151% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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. What's good is that dividends were well covered by free cash flow, with the company paying out 23% of its cash flow last year.

It's good to see that while Fad International's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit Fad International paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see Fad International's earnings per share have dropped 16% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Given that Fad International has only been paying a dividend for a year, there's not much of a past history to draw insight from.

Final Takeaway

Has Fad International got what it takes to maintain its dividend payments? It's never great to see earnings per share declining, especially when a company is paying out 151% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Fad International's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that being said, if you're still considering Fad International as an investment, you'll find it beneficial to know what risks this stock is facing.

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.

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.