It looks like China Water Affairs Group Limited (HKG:855) is about to go ex-dividend in the next four days. You will need to purchase shares before the 8th of September to receive the dividend, which will be paid on the 16th of October.
China Water Affairs Group’s next dividend payment will be HK$0.16 per share, and in the last 12 months, the company paid a total of HK$0.30 per share. Looking at the last 12 months of distributions, China Water Affairs Group has a trailing yield of approximately 4.8% on its current stock price of HK$6.31. 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! That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.
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 China Water Affairs Group paying out a modest 29% of its earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the past year it paid out 127% of its free cash flow as dividends, which is uncomfortably high. It’s hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we’d wonder how the company justifies this payout level.
While China Water Affairs Group’s dividends were covered by the company’s reported profits, cash is somewhat more important, so it’s not great to see that the company didn’t generate enough cash to pay its dividend. Cash is king, as they say, and were China Water Affairs Group to repeatedly pay dividends that aren’t well covered by cashflow, we would consider this a warning sign.
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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It’s encouraging to see China Water Affairs Group has grown its earnings rapidly, up 31% a year for the past five years. Earnings have been growing quickly, 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. Since the start of our data, 10 years ago, China Water Affairs Group has lifted its dividend by approximately 22% a year on average. It’s exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
Is China Water Affairs Group an attractive dividend stock, or better left on the shelf? We’re glad to see the company has been improving its earnings per share while also paying out a low percentage of income. However, it’s not great to see it paying out what we see as an uncomfortably high percentage of its cash flow. In summary, it’s hard to get excited about China Water Affairs Group from a dividend perspective.
With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. For example, we’ve found 2 warning signs for China Water Affairs Group (1 is a bit unpleasant!) that deserve your attention before investing in the shares.
If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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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. 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.
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