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 three days. 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 important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Therefore, if you purchase K. Wah International Holdings' shares on or after the 6th of September, you won't be eligible to receive the dividend, when it is paid on the 25th of October.

The company's next dividend payment will be HK$0.04 per share. Last year, in total, the company distributed HK$0.13 to shareholders. Last year's total dividend payments show that K. Wah International Holdings has a trailing yield of 7.6% on the current share price of HK$1.72. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. 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

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. It paid out 86% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be concerned if earnings began to decline. 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 paid out 97% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

K. Wah International Holdings paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the 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. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. K. Wah International Holdings's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 35% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. K. Wah International Holdings has seen its dividend decline 1.4% per annum on average over the past 10 years, which is not great to see.

To Sum It Up

Should investors buy K. Wah International Holdings for the upcoming dividend? K. Wah International Holdings had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

So if you're still interested in K. Wah International Holdings despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Our analysis shows 1 warning sign for K. Wah International Holdings and you should be aware of this before buying any shares.

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.