It Might Not Be A Great Idea To Buy Tam Jai International Co. Limited (HKG:2217) For Its Next Dividend

Tam Jai International Co. Limited (HKG:2217) stock is about to trade ex-dividend in four days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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 Tam Jai International's shares on or after the 27th of November will not receive the dividend, which will be paid on the 16th of December.

The company's next dividend payment will be HK$0.0135 per share, on the back of last year when the company paid a total of HK$0.072 to shareholders. Calculating the last year's worth of payments shows that Tam Jai International has a trailing yield of 9.5% on the current share price of HK$0.76. 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 Tam Jai International can afford its dividend, and if the dividend could grow.

See our latest analysis for Tam Jai International

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. Tam Jai International distributed an unsustainably high 133% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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. Thankfully its dividend payments took up just 32% of the free cash flow it generated, which is a comfortable payout ratio.

It's good to see that while Tam Jai International's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

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. With that in mind, we're discomforted by Tam Jai International's 23% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Tam Jai International's dividend payments per share have declined at 14% per year on average over the past three 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.

Final Takeaway

Is Tam Jai International an attractive dividend stock, or better left on the shelf? It's never great to see earnings per share declining, especially when a company is paying out 133% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Tam Jai International's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not that we think Tam Jai International is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in Tam Jai International and want to know more, you'll find it very useful to know what risks this stock faces. To help with this, we've discovered 2 warning signs for Tam Jai International that you should be aware of before investing in their shares.

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.