Should You Buy Kato (Hong Kong) Holdings Limited (HKG:2189) For Its Upcoming Dividend?

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Kato (Hong Kong) Holdings Limited (HKG:2189) is about to trade ex-dividend in the next four days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. 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. Therefore, if you purchase Kato (Hong Kong) Holdings' shares on or after the 18th of December, you won't be eligible to receive the dividend, when it is paid on the 5th of January.

The company's next dividend payment will be HK$0.01 per share. Last year, in total, the company distributed HK$0.02 to shareholders. Last year's total dividend payments show that Kato (Hong Kong) Holdings has a trailing yield of 3.9% on the current share price of HK$0.51. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

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. That's why it's good to see Kato (Hong Kong) Holdings paying out a modest 36% of its earnings. A useful secondary check can be to evaluate whether Kato (Hong Kong) Holdings generated enough free cash flow to afford its dividend. Fortunately, it paid out only 44% of its free cash flow in the past year.

It's positive to see that Kato (Hong Kong) 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 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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. For this reason, we're glad to see Kato (Hong Kong) Holdings's earnings per share have risen 13% per annum over the last five years. The company has managed to grow earnings at a rapid rate, while reinvesting most of the profits within the business. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Kato (Hong Kong) Holdings has seen its dividend decline 16% per annum on average over the past four years, which is not great to see. It's unusual to see earnings per share increasing at the same time as dividends per share have been in decline. We'd hope it's because the company is reinvesting heavily in its business, but it could also suggest business is lumpy.

The Bottom Line

Should investors buy Kato (Hong Kong) Holdings for the upcoming dividend? Kato (Hong Kong) 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 four years, but the conservative payout ratio makes the current dividend look sustainable. There's a lot to like about Kato (Hong Kong) Holdings, and we would prioritise taking a closer look at it.

On that note, you'll want to research what risks Kato (Hong Kong) Holdings is facing. For example - Kato (Hong Kong) Holdings has 3 warning signs we think 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.

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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.