It looks like The Hong Kong and China Gas Company Limited (HKG:3) is about to go ex-dividend in the next 1 days. You can purchase shares before the 9th of June in order to receive the dividend, which the company will pay on the 23rd of June.
Hong Kong and China Gas’s next dividend payment will be HK$0.23 per share, and in the last 12 months, the company paid a total of HK$0.35 per share. Based on the last year’s worth of payments, Hong Kong and China Gas has a trailing yield of 2.6% on the current stock price of HK$13.66. 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 Hong Kong and China Gas can afford its dividend, and if the dividend could grow.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Its dividend payout ratio is 85% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. 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. Hong Kong and China Gas paid out more free cash flow than it generated – 176%, 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.
Hong Kong and China Gas 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 Hong Kong and China Gas’s ability to maintain its dividend.
Have Earnings And Dividends Been Growing?
Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That explains why we’re not overly excited about Hong Kong and China Gas’s flat earnings 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.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Hong Kong and China Gas has delivered 10% dividend growth per year on average over the past ten years.
To Sum It Up
Has Hong Kong and China Gas got what it takes to maintain its dividend payments? It’s not great to see earnings per share have been flat and that the company paid out an uncomfortably high percentage of its cash flow over the past year. Cash flows are typically more volatile than earnings, but this is still not what we like to see. Overall it doesn’t look like the most suitable dividend stock for a long-term buy and hold investor.
With that in mind though, if the poor dividend characteristics of Hong Kong and China Gas don’t faze you, it’s worth being mindful of the risks involved with this business. In terms of investment risks, we’ve identified 1 warning sign with Hong Kong and China Gas and understanding them should be part of your investment process.
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.
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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. Thank you for reading.