Readers hoping to buy Liu Chong Hing Investment Limited (HKG:194) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is one business day 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 two full business days. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase Liu Chong Hing Investment's shares before the 27th of August to receive the dividend, which will be paid on the 10th of September.
The company's upcoming dividend is HK$0.18 a share, following on from the last 12 months, when the company distributed a total of HK$0.43 per share to shareholders. Based on the last year's worth of payments, Liu Chong Hing Investment stock has a trailing yield of around 5.3% on the current share price of HK$8.15. 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. We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. That's why it's good to see Liu Chong Hing Investment paying out a modest 43% of its earnings. 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. Over the last year, it paid out more than three-quarters (78%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.
It's positive to see that Liu Chong Hing Investment's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're not enthused to see that Liu Chong Hing Investment's earnings per share have remained effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, nine years ago, Liu Chong Hing Investment has lifted its dividend by approximately 4.1% a year on average.
The Bottom Line
Has Liu Chong Hing Investment got what it takes to maintain its dividend payments? Its earnings per share are effectively flat in recent times. The company paid out less than half its income and more than half its cash flow as dividends to shareholders. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Liu Chong Hing Investment's dividend merits.
If you're not too concerned about Liu Chong Hing Investment's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. For example, Liu Chong Hing Investment has 3 warning signs (and 1 which is significant) we think you should know about.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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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.
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