Do These 3 Checks Before Buying Kowloon Development Company Limited (HKG:34) For Its Upcoming Dividend

Kowloon Development Company Limited (HKG:34) is about to trade ex-dividend in the next three days. The ex-dividend date is commonly two business days 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. The ex-dividend date is important as the process of settlement involves at least 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, Kowloon Development investors that purchase the stock on or after the 11th of December will not receive the dividend, which will be paid on the 7th of January.

The company's upcoming dividend is HK$0.10 a share, following on from the last 12 months, when the company distributed a total of HK$0.22 per share to shareholders. Calculating the last year's worth of payments shows that Kowloon Development has a trailing yield of 5.4% on the current share price of HK$4.07. If you buy this business for its dividend, you should have an idea of whether Kowloon Development's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

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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. Last year, Kowloon Development paid out 226% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. The good news is it paid out just 8.6% of its free cash flow in the last year.

It's good to see that while Kowloon Development's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

See our latest analysis for Kowloon Development

Click here to see how much of its profit Kowloon Development 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. Kowloon Development's earnings per share have plummeted approximately 42% a year over the previous five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Kowloon Development has seen its dividend decline 8.1% per annum on average over the past 10 years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

Final Takeaway

From a dividend perspective, should investors buy or avoid Kowloon Development? It's never great to see earnings per share declining, especially when a company is paying out 226% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Kowloon Development's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. Bottom line: Kowloon Development has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that being said, if you're still considering Kowloon Development as an investment, you'll find it beneficial to know what risks this stock is facing. Be aware that Kowloon Development is showing 5 warning signs in our investment analysis, and 2 of those are significant...

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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.