Do These 3 Checks Before Buying SmarTone Telecommunications Holdings Limited (HKG:315) For Its Upcoming Dividend

It looks like SmarTone Telecommunications Holdings Limited (HKG:315) is about to go ex-dividend in the next 4 days. 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. 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. This means that investors who purchase SmarTone Telecommunications Holdings' shares on or after the 6th of November will not receive the dividend, which will be paid on the 17th of November.

The company's upcoming dividend is HK$0.17 a share, following on from the last 12 months, when the company distributed a total of HK$0.32 per share to shareholders. Looking at the last 12 months of distributions, SmarTone Telecommunications Holdings has a trailing yield of approximately 7.7% on its current stock price of HK$4.14. 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.

View our latest analysis for SmarTone Telecommunications Holdings

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. SmarTone Telecommunications Holdings distributed an unsustainably high 132% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether SmarTone Telecommunications Holdings generated enough free cash flow to afford its dividend. It distributed 25% of its free cash flow as dividends, a comfortable payout level for most companies.

It's good to see that while SmarTone Telecommunications Holdings's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. 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 discomforted by SmarTone Telecommunications Holdings's 15% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. SmarTone Telecommunications Holdings has seen its dividend decline 10% 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

Is SmarTone Telecommunications Holdings worth buying for its dividend? It's never great to see earnings per share declining, especially when a company is paying out 132% 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. It's not that we think SmarTone Telecommunications Holdings is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in SmarTone Telecommunications Holdings and want to know more, you'll find it very useful to know what risks this stock faces. To help with this, we've discovered 2 warning signs for SmarTone Telecommunications Holdings that you should be aware of before investing in their shares.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.