Don't Buy K. Wah International Holdings Limited (HKG:173) For Its Next Dividend Without Doing These Checks

K. Wah International Holdings Limited (HKG:173) is about to trade ex-dividend in the next 4 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Accordingly, K. Wah International Holdings investors that purchase the stock on or after the 17th of June will not receive the dividend, which will be paid on the 24th of July.

The company's upcoming dividend is HK$0.09 a share, following on from the last 12 months, when the company distributed a total of HK$0.16 per share to shareholders. Based on the last year's worth of payments, K. Wah International Holdings has a trailing yield of 9.0% on the current stock price of HK$1.77. If you buy this business for its dividend, you should have an idea of whether K. Wah International Holdings's dividend is reliable and sustainable. So we need to investigate whether K. Wah International Holdings can afford its dividend, and if the dividend could grow.

Check out our latest analysis for K. Wah International Holdings

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. K. Wah International Holdings paid out 62% of its earnings to investors last year, a normal payout level for most businesses. 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. The company paid out 97% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

While K. Wah International Holdings's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to K. Wah International Holdings's ability to maintain its dividend.

Click here to see how much of its profit K. Wah International Holdings paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. K. Wah International Holdings's earnings per share have fallen at approximately 28% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, K. Wah International Holdings has increased its dividend at approximately 0.6% a year on average.

Final Takeaway

Is K. Wah International Holdings worth buying for its dividend? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. It's not that we think K. Wah International Holdings is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that being said, if you're still considering K. Wah International Holdings as an investment, you'll find it beneficial to know what risks this stock is facing. For example - K. Wah International Holdings has 1 warning sign we think you should be aware of.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.