Why It Might Not Make Sense To Buy Café de Coral Holdings Limited (HKG:341) For Its Upcoming Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Café de Coral Holdings Limited (HKG:341) is about to go ex-dividend in just 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. In other words, investors can purchase Café de Coral Holdings' shares before the 10th of September in order to be eligible for the dividend, which will be paid on the 24th of September.

The company's next dividend payment will be HK$0.42 per share. Last year, in total, the company distributed HK$0.57 to shareholders. Last year's total dividend payments show that Café de Coral Holdings has a trailing yield of 6.9% on the current share price of HK$8.25. 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 Café de Coral Holdings can afford its dividend, and if the dividend could grow.

See our latest analysis for Café de Coral Holdings

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year Café de Coral Holdings paid out 100% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. A useful secondary check can be to evaluate whether Café de Coral Holdings generated enough free cash flow to afford its dividend. It paid out 19% of its free cash flow as dividends last year, which is conservatively low.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Café de Coral Holdings fortunately did generate enough cash to fund its dividend. 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. Readers will understand then, why we're concerned to see Café de Coral Holdings's earnings per share have dropped 10% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Café de Coral Holdings's dividend payments per share have declined at 1.7% per year on average over the past 10 years, which is uninspiring.

The Bottom Line

Has Café de Coral Holdings got what it takes to maintain its dividend payments? It's never great to see earnings per share declining, especially when a company is paying out 100% 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 Café de Coral Holdings's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not that we think Café de Coral Holdings is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in Café de Coral Holdings and want to know more, you'll find it very useful to know what risks this stock faces. Case in point: We've spotted 1 warning sign for Café de Coral Holdings you should be aware of.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.