Kato (Hong Kong) Holdings (HKG:2189) Could Be A Buy 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 Kato (Hong Kong) Holdings Limited (HKG:2189) is about to go ex-dividend in just 4 days. You will need to purchase shares before the 7th of December to receive the dividend, which will be paid on the 18th of December.

Kato (Hong Kong) Holdings's next dividend payment will be HK$0.02 per share, and in the last 12 months, the company paid a total of HK$0.04 per share. Looking at the last 12 months of distributions, Kato (Hong Kong) Holdings has a trailing yield of approximately 7.1% on its current stock price of HK$0.56. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Kato (Hong Kong) Holdings can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Kato (Hong Kong) 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. Kato (Hong Kong) Holdings is paying out an acceptable 66% of its profit, a common payout level among most companies. 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. It distributed 31% of its free cash flow as dividends, a comfortable payout level for most companies.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see how much of its profit Kato (Hong Kong) Holdings paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see Kato (Hong Kong) Holdings earnings per share are up 8.1% per annum over the last five years. Decent historical earnings per share growth suggests Kato (Hong Kong) Holdings has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. Therefore it's unlikely that the company will be able to reinvest heavily in its business, which could presage slower growth in the future.

We'd also point out that Kato (Hong Kong) Holdings issued a meaningful number of new shares in the past year. It's hard to grow dividends per share when a company keeps creating new shares.

Unfortunately Kato (Hong Kong) Holdings has only been paying a dividend for a year or so, so there's not much of a history to draw insight from.

Final Takeaway

Is Kato (Hong Kong) Holdings worth buying for its dividend? Earnings per share growth has been modest and Kato (Hong Kong) Holdings paid out over half of its profits and less than half of its free cash flow, although both payout ratios are within normal limits. To summarise, Kato (Hong Kong) Holdings looks okay on this analysis, although it doesn't appear a stand-out opportunity.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. Every company has risks, and we've spotted 2 warning signs for Kato (Hong Kong) Holdings 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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