Don't Race Out To Buy Telecom Service One Holdings Limited (HKG:3997) Just Because It's Going Ex-Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Telecom Service One Holdings Limited (HKG:3997) is about to trade ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 8th of December will not receive this dividend, which will be paid on the 21st of December.

Telecom Service One Holdings's next dividend payment will be HK$0.03 per share. Last year, in total, the company distributed HK$0.05 to shareholders. Based on the last year's worth of payments, Telecom Service One Holdings has a trailing yield of 5.3% on the current stock price of HK$0.94. If you buy this business for its dividend, you should have an idea of whether Telecom Service One Holdings's dividend is reliable and sustainable. So we need to investigate whether Telecom Service One Holdings can afford its dividend, and if the dividend could grow.

See our latest analysis for Telecom Service One Holdings

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. An unusually high payout ratio of 235% of its profit suggests something is happening other than the usual distribution of profits to shareholders. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out 80% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Telecom Service One Holdings fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see how much of its profit Telecom Service One Holdings paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Telecom Service One Holdings's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 30% a year over the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Telecom Service One Holdings's dividend payments per share have declined at 24% per year on average over the past six years, which is uninspiring. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

To Sum It Up

From a dividend perspective, should investors buy or avoid Telecom Service One Holdings? Earnings per share have been shrinking in recent times. Additionally, Telecom Service One Holdings is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Telecom Service One Holdings.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Telecom Service One Holdings. For example, Telecom Service One Holdings has 5 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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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