Dividend Investors: Don't Be Too Quick To Buy China Gas Holdings Limited (HKG:384) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see China Gas Holdings Limited (HKG:384) is about to trade ex-dividend in the next three days. 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Thus, you can purchase China Gas Holdings' shares before the 4th of January in order to receive the dividend, which the company will pay on the 2nd of February.

The company's next dividend payment will be HK$0.15 per share. Last year, in total, the company distributed HK$0.55 to shareholders. Last year's total dividend payments show that China Gas Holdings has a trailing yield of 7.1% on the current share price of HK$7.71. If you buy this business for its dividend, you should have an idea of whether China Gas Holdings's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for China Gas Holdings

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year China Gas Holdings paid out 103% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. 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. Thankfully its dividend payments took up just 43% of the free cash flow it generated, which is a comfortable payout ratio.

It's good to see that while China Gas Holdings's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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

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. With that in mind, we're discomforted by China Gas Holdings's 16% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, China Gas Holdings has lifted its dividend by approximately 21% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. China Gas Holdings is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

Final Takeaway

Has China Gas Holdings got what it takes to maintain its dividend payments? It's never great to see earnings per share declining, especially when a company is paying out 103% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in China Gas Holdings's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not that we think China Gas Holdings is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that in mind though, if the poor dividend characteristics of China Gas Holdings don't faze you, it's worth being mindful of the risks involved with this business. To that end, you should learn about the 3 warning signs we've spotted with China Gas Holdings (including 1 which makes us a bit uncomfortable).

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.