We Wouldn’t Be Too Quick To Buy Xiamen International Port Co., Ltd (HKG:3378) Before It Goes Ex-Dividend

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Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Xiamen International Port Co., Ltd (HKG:3378) is about to go ex-dividend in just 2 days. Ex-dividend means that investors that purchase the stock on or after the 19th of June will not receive this dividend, which will be paid on the 31st of July.

Xiamen International Port’s next dividend payment will be CN¥0.02 per share, on the back of last year when the company paid a total of CN¥0.02 to shareholders. Based on the last year’s worth of payments, Xiamen International Port stock has a trailing yield of around 2.2% on the current share price of HK$1.03. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Xiamen International Port

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. Xiamen International Port is paying out just 22% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. 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. Over the past year it paid out 135% of its free cash flow as dividends, which is uncomfortably 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.

Xiamen International Port paid out less in dividends than it reported in profits, but unfortunately it didn’t generate enough cash to cover the dividend. Cash is king, as they say, and were Xiamen International Port to repeatedly pay dividends that aren’t well covered by cashflow, we would consider this a warning sign.

Click this link to see how much of its profit Xiamen International Port paid out over the last 12 months.

SEHK:3378 Historical Dividend Yield, June 16th 2019
SEHK:3378 Historical Dividend Yield, June 16th 2019

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we’re discomforted by Xiamen International Port’s 6.0%per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Xiamen International Port’s dividend payments per share have declined at 9.7% per year on average over the past 9 years, which is uninspiring. 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.

The Bottom Line

Should investors buy Xiamen International Port for the upcoming dividend? It’s disappointing to see earnings per share declining, and this would ordinarily be enough to discourage us from most dividend stocks, even though Xiamen International Port is paying out less than half its income as dividends. However, it’s also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. It’s not an attractive combination from a dividend perspective, and we’re inclined to pass on this one for the time being.

Want to learn more about Xiamen International Port? Here’s a visualisation of its historical rate of revenue and earnings growth.

We wouldn’t recommend just buying the first dividend stock you see, though. Here’s a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.