It Might Not Be A Great Idea To Buy Wing On Company International Limited (HKG:289) For Its Next Dividend

Wing On Company International Limited (HKG:289) is about to trade ex-dividend in the next three days. The ex-dividend date occurs one day 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. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Therefore, if you purchase Wing On Company International's shares on or after the 5th of October, you won't be eligible to receive the dividend, when it is paid on the 26th of October.

The company's next dividend payment will be HK$0.34 per share. Last year, in total, the company distributed HK$0.68 to shareholders. Based on the last year's worth of payments, Wing On Company International has a trailing yield of 5.5% on the current stock price of HK$12.4. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Wing On Company International

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Wing On Company International distributed an unsustainably high 179% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Wing On Company International fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see how much of its profit Wing On Company International paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Wing On Company International's earnings per share have plummeted approximately 50% 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. Wing On Company International's dividend payments per share have declined at 5.1% per year on average over the past 10 years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

The Bottom Line

Is Wing On Company International an attractive dividend stock, or better left on the shelf? It's never great to see earnings per share declining, especially when a company is paying out 179% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. Bottom line: Wing On Company International has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Although, if you're still interested in Wing On Company International and want to know more, you'll find it very useful to know what risks this stock faces. For instance, we've identified 3 warning signs for Wing On Company International (2 are significant) 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.