Is It Smart To Buy Chen Hsong Holdings Limited (HKG:57) Before It Goes Ex-Dividend?

It looks like Chen Hsong Holdings Limited (HKG:57) is about to go ex-dividend in the next 3 days. You can purchase shares before the 11th of December in order to receive the dividend, which the company will pay on the 12th of January.

Chen Hsong Holdings's next dividend payment will be HK$0.045 per share, on the back of last year when the company paid a total of HK$0.073 to shareholders. Based on the last year's worth of payments, Chen Hsong Holdings stock has a trailing yield of around 3.5% on the current share price of HK$2.09. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Chen Hsong Holdings can afford its dividend, and if the dividend could grow.

View our latest analysis for Chen Hsong Holdings

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. Fortunately Chen Hsong Holdings's payout ratio is modest, at just 39% of profit. A useful secondary check can be to evaluate whether Chen Hsong Holdings generated enough free cash flow to afford its dividend. It distributed 33% of its free cash flow as dividends, a comfortable payout level for most companies.

It's positive to see that Chen Hsong Holdings's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see how much of its profit Chen Hsong Holdings paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's comforting to see Chen Hsong Holdings's earnings have been skyrocketing, up 45% per annum for the past five years. Chen Hsong Holdings is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Chen Hsong Holdings's dividend payments per share have declined at 4.8% per year on average over the past 10 years, which is uninspiring. Chen Hsong Holdings is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.

Final Takeaway

Is Chen Hsong Holdings an attractive dividend stock, or better left on the shelf? Chen Hsong Holdings has grown its earnings per share while simultaneously reinvesting in the business. Unfortunately it's cut the dividend at least once in the past 10 years, but the conservative payout ratio makes the current dividend look sustainable. Overall we think this is an attractive combination and worthy of further research.

So while Chen Hsong Holdings looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Case in point: We've spotted 2 warning signs for Chen Hsong Holdings you should be aware of.

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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