We Wouldn't Be Too Quick To Buy The Hong Kong and China Gas Company Limited (HKG:3) Before It Goes Ex-Dividend

Readers hoping to buy The Hong Kong and China Gas Company Limited (HKG:3) 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 a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. 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. Therefore, if you purchase Hong Kong and China Gas' shares on or after the 2nd of September, you won't be eligible to receive the dividend, when it is paid on the 15th of September.

The company's upcoming dividend is HK$0.12 a share, following on from the last 12 months, when the company distributed a total of HK$0.35 per share to shareholders. Based on the last year's worth of payments, Hong Kong and China Gas has a trailing yield of 2.8% on the current stock price of HK$12.64. If you buy this business for its dividend, you should have an idea of whether Hong Kong and China Gas's dividend is reliable and sustainable. So we need to investigate whether Hong Kong and China Gas can afford its dividend, and if the dividend could grow.

See our latest analysis for Hong Kong and China Gas

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. It paid out 84% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be concerned if earnings began to decline. 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 last year, it paid out dividends equivalent to 224% of what it generated in free cash flow, a disturbingly high percentage. It's pretty hard to pay out more than you earn, so we wonder how Hong Kong and China Gas intends to continue funding this dividend, or if it could be forced to cut the payment.

While Hong Kong and China Gas's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Hong Kong and China Gas's ability to maintain its dividend.

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

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 Hong Kong and China Gas's earnings per share have remained effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. Earnings have been growing somewhat, 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. Hong Kong and China Gas has delivered 11% dividend growth per year on average over the past 10 years.

To Sum It Up

Should investors buy Hong Kong and China Gas for the upcoming dividend? Hong Kong and China Gas is paying out a reasonable percentage of its income yet an uncomfortably high 224% of its cash flow as dividends. What's more, earnings have barely grown. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Although, if you're still interested in Hong Kong and China Gas and want to know more, you'll find it very useful to know what risks this stock faces. For example - Hong Kong and China Gas has 1 warning sign we think you should be aware of.

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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