Is It Worth Considering FSE Lifestyle Services Limited (HKG:331) For Its Upcoming Dividend?

FSE Lifestyle Services Limited (HKG:331) is about to trade ex-dividend in the next 3 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. This means that investors who purchase FSE Lifestyle Services' shares on or after the 28th of November will not receive the dividend, which will be paid on the 16th of December.

The company's upcoming dividend is HK$0.214 a share, following on from the last 12 months, when the company distributed a total of HK$0.44 per share to shareholders. Last year's total dividend payments show that FSE Lifestyle Services has a trailing yield of 7.6% on the current share price of HK$5.78. 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 FSE Lifestyle Services can afford its dividend, and if the dividend could grow.

See our latest analysis for FSE Lifestyle Services

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. That's why it's good to see FSE Lifestyle Services paying out a modest 40% 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. FSE Lifestyle Services paid out more free cash flow than it generated - 178%, 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.

FSE Lifestyle Services does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

FSE Lifestyle Services 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 FSE Lifestyle Services's ability to maintain its dividend.

Click here to see how much of its profit FSE Lifestyle Services paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see FSE Lifestyle Services earnings per share are up 9.9% per annum over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, nine years ago, FSE Lifestyle Services has lifted its dividend by approximately 18% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

The Bottom Line

Is FSE Lifestyle Services worth buying for its dividend? FSE Lifestyle Services delivered reasonable earnings per share growth in recent times, and paid out less than half its profits and 178% of its cash flow over the last year, which is a mediocre outcome. All things considered, we are not particularly enthused about FSE Lifestyle Services from a dividend perspective.

With that being said, if dividends aren't your biggest concern with FSE Lifestyle Services, you should know about the other risks facing this business. To that end, you should learn about the 2 warning signs we've spotted with FSE Lifestyle Services (including 1 which doesn't sit too well with us).

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.