It Might Not Be A Great Idea To Buy China Motor Bus Company, Limited (HKG:26) For Its Next Dividend

Readers hoping to buy China Motor Bus Company, Limited (HKG:26) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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. 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. Meaning, you will need to purchase China Motor Bus Company's shares before the 30th of September to receive the dividend, which will be paid on the 17th of October.

The company's next dividend payment will be HK$0.30 per share. Last year, in total, the company distributed HK$3.20 to shareholders. Calculating the last year's worth of payments shows that China Motor Bus Company has a trailing yield of 6.1% on the current share price of HK$52.45. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for China Motor Bus Company

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. China Motor Bus Company's dividend is not well covered by earnings, as the company lost money last year. This is not a sustainable state of affairs, so it would be worth investigating if earnings are expected to recover. With the recent loss, it's important to check if the business generated enough cash to pay its 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. Dividends consumed 57% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

Click here to see how much of its profit China Motor Bus Company 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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. China Motor Bus Company 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.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, China Motor Bus Company has increased its dividend at approximately 3.4% a year on average.

Get our latest analysis on China Motor Bus Company's balance sheet health here.

To Sum It Up

From a dividend perspective, should investors buy or avoid China Motor Bus Company? We're a bit uncomfortable with it paying a dividend while being loss-making. However, we note that the dividend was covered by cash flow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that being said, if you're still considering China Motor Bus Company as an investment, you'll find it beneficial to know what risks this stock is facing. Case in point: We've spotted 2 warning signs for China Motor Bus Company 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.