Readers hoping to buy Ngai Hing Hong Company Limited (HKG:1047) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order 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. Meaning, you will need to purchase Ngai Hing Hong's shares before the 21st of March to receive the dividend, which will be paid on the 11th of April.
The company's next dividend payment will be HK$0.015 per share. Last year, in total, the company distributed HK$0.03 to shareholders. Based on the last year's worth of payments, Ngai Hing Hong has a trailing yield of 5.5% on the current stock price of HK$0.55. If you buy this business for its dividend, you should have an idea of whether Ngai Hing Hong's dividend is reliable and sustainable. So we need to investigate whether Ngai Hing Hong can afford its dividend, and if the dividend could grow.
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. Ngai Hing Hong is paying out just 11% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. A useful secondary check can be to evaluate whether Ngai Hing Hong generated enough free cash flow to afford its dividend. The good news is it paid out just 6.7% of its free cash flow in the last year.
It's positive to see that Ngai Hing Hong'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.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's comforting to see Ngai Hing Hong's earnings have been skyrocketing, up 20% per annum for the past five years. Ngai Hing Hong looks like a real growth company, with earnings per share growing at a cracking pace and the company reinvesting most of its profits in the business.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Ngai Hing Hong has lifted its dividend by approximately 4.1% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Ngai Hing Hong is keeping back more of its profits to grow the business.
To Sum It Up
Is Ngai Hing Hong worth buying for its dividend? It's great that Ngai Hing Hong is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It's disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. Overall we think this is an attractive combination and worthy of further research.
While it's tempting to invest in Ngai Hing Hong for the dividends alone, you should always be mindful of the risks involved. For example - Ngai Hing Hong has 2 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.
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.