Don't Race Out To Buy New Hope Service Holdings Limited (HKG:3658) Just Because It's Going Ex-Dividend

New Hope Service Holdings Limited (HKG:3658) stock is about to trade ex-dividend in 4 days. The ex-dividend date generally occurs two days 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. 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. Thus, you can purchase New Hope Service Holdings' shares before the 18th of June in order to receive the dividend, which the company will pay on the 15th of August.

The company's upcoming dividend is CN¥0.076 a share, following on from the last 12 months, when the company distributed a total of CN¥0.16 per share to shareholders. Based on the last year's worth of payments, New Hope Service Holdings stock has a trailing yield of around 9.0% on the current share price of HK$1.92. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

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Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. New Hope Service Holdings paid out 57% of its earnings to investors last year, a normal payout level for most businesses. 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. New Hope Service Holdings paid out more free cash flow than it generated - 126%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

New Hope Service Holdings does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

New Hope Service 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 New Hope Service Holdings's ability to maintain its dividend.

Check out our latest analysis for New Hope Service Holdings

Click here to see how much of its profit New Hope Service Holdings paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see New Hope Service Holdings earnings per share are up 6.8% per annum over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. New Hope Service Holdings has delivered an average of 31% per year annual increase in its dividend, based on the past three years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Should investors buy New Hope Service Holdings for the upcoming dividend? New Hope Service Holdings is paying out a reasonable percentage of its income and an uncomfortably high 126% of its cash flow as dividends. At least earnings per share have been growing steadily. It's not that we think New Hope Service Holdings is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in New Hope Service Holdings and want to know more, you'll find it very useful to know what risks this stock faces. Every company has risks, and we've spotted 2 warning signs for New Hope Service Holdings (of which 1 is potentially serious!) you should know about.

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.