Don't Buy HL Corp (Shenzhen) (SZSE:002105) For Its Next Dividend Without Doing These Checks

HL Corp (Shenzhen) (SZSE:002105) stock is about to trade ex-dividend in four days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase HL Corp (Shenzhen)'s shares before the 18th of June to receive the dividend, which will be paid on the 18th of June.

The company's next dividend payment will be CN¥0.03 per share. Last year, in total, the company distributed CN¥0.03 to shareholders. Looking at the last 12 months of distributions, HL Corp (Shenzhen) has a trailing yield of approximately 0.7% on its current stock price of CN¥4.27. If you buy this business for its dividend, you should have an idea of whether HL Corp (Shenzhen)'s dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for HL Corp (Shenzhen)

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. Last year, HL Corp (Shenzhen) paid out 92% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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. HL Corp (Shenzhen) paid out more free cash flow than it generated - 117%, to be precise - last year, which we think is concerningly 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.

Cash is slightly more important than profit from a dividend perspective, but given HL Corp (Shenzhen)'s payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

Click here to see how much of its profit HL Corp (Shenzhen) paid out over the last 12 months.

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 earnings fall far enough, the company could be forced to cut its dividend. That explains why we're not overly excited about HL Corp (Shenzhen)'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. Minimal earnings growth, combined with concerningly high payout ratios suggests that HL Corp (Shenzhen) is unlikely to grow the dividend much in future, and indeed the payment could be vulnerable to a cut.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. HL Corp (Shenzhen) has delivered an average of 7.5% per year annual increase in its dividend, based on the past 10 years of dividend payments.

Final Takeaway

From a dividend perspective, should investors buy or avoid HL Corp (Shenzhen)? Earnings per share are effectively flat, plus HL Corp (Shenzhen)'s dividend is not well covered by either earnings or cash flow, which is not great. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that being said, if you're still considering HL Corp (Shenzhen) as an investment, you'll find it beneficial to know what risks this stock is facing. Our analysis shows 3 warning signs for HL Corp (Shenzhen) and you should be aware of these before buying any shares.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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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.