It Might Not Be A Great Idea To Buy Liu Chong Hing Investment Limited (HKG:194) For Its Next Dividend

It looks like Liu Chong Hing Investment Limited (HKG:194) is about to go ex-dividend in the next 4 days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Accordingly, Liu Chong Hing Investment investors that purchase the stock on or after the 27th of May will not receive the dividend, which will be paid on the 7th of June.

The company's next dividend payment will be HK$0.17 per share, on the back of last year when the company paid a total of HK$0.28 to shareholders. Calculating the last year's worth of payments shows that Liu Chong Hing Investment has a trailing yield of 5.7% on the current share price of HK$4.95. If you buy this business for its dividend, you should have an idea of whether Liu Chong Hing Investment's dividend is reliable and sustainable. 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 Liu Chong Hing Investment

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Liu Chong Hing Investment reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. The company paid out 93% of its free cash flow over the last year, which we think is outside the ideal range 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.

Click here to see how much of its profit Liu Chong Hing Investment paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Liu Chong Hing Investment reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Liu Chong Hing Investment's dividend payments are broadly unchanged compared to where they were 10 years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.

We update our analysis on Liu Chong Hing Investment every 24 hours, so you can always get the latest insights on its financial health, here.

The Bottom Line

Has Liu Chong Hing Investment got what it takes to maintain its dividend payments? We're a bit uncomfortable with it paying a dividend while being loss-making, especially given that the dividend was not well covered by free cash flow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Liu Chong Hing Investment. For instance, we've identified 2 warning signs for Liu Chong Hing Investment (1 doesn't sit too well with us) you should be aware of.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.