Do These 3 Checks Before Buying Sunningdale Tech Ltd (SGX:BHQ) For Its Upcoming Dividend

It looks like Sunningdale Tech Ltd (SGX:BHQ) is about to go ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 27th of August will not receive the dividend, which will be paid on the 11th of September.

Sunningdale Tech's next dividend payment will be S$0.03 per share, on the back of last year when the company paid a total of S$0.08 to shareholders. Last year's total dividend payments show that Sunningdale Tech has a trailing yield of 6.2% on the current share price of SGD1.3. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for Sunningdale Tech

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. It paid out 86% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be concerned if earnings began to decline. 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. Sunningdale Tech paid out more free cash flow than it generated - 178%, to be precise - last year, which we think is concerningly 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.

Sunningdale Tech paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Sunningdale Tech to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's not encouraging to see that Sunningdale Tech's earnings are effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Sunningdale Tech has lifted its dividend by approximately 15% a year on average.

To Sum It Up

Is Sunningdale Tech an attractive dividend stock, or better left on the shelf? Sunningdale Tech is paying out a reasonable percentage of its income yet an uncomfortably high 178% of its cash flow as dividends. What's more, earnings have barely grown. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Sunningdale Tech.

Curious what other investors think of Sunningdale Tech? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.