Why You Might Be Interested In Hong Leong Asia Ltd. (SGX:H22) For Its Upcoming Dividend

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 Hong Leong Asia Ltd. (SGX:H22) is about to go ex-dividend in just 3 days. 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Meaning, you will need to purchase Hong Leong Asia's shares before the 3rd of May to receive the dividend, which will be paid on the 15th of May.

The company's next dividend payment will be S$0.02 per share, and in the last 12 months, the company paid a total of S$0.02 per share. Based on the last year's worth of payments, Hong Leong Asia has a trailing yield of 3.3% on the current stock price of S$0.605. If you buy this business for its dividend, you should have an idea of whether Hong Leong Asia's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Hong Leong Asia

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Hong Leong Asia is paying out just 23% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out 5.7% of its free cash flow as dividends last year, which is conservatively low.

It's positive to see that Hong Leong Asia's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see how much of its profit Hong Leong Asia paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. 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 encouraged by the steady growth at Hong Leong Asia, with earnings per share up 9.1% on average over the last five years. Earnings per share have been increasing steadily and management is reinvesting almost all of the profits back into the business. If profits are reinvested effectively, this could be a bullish combination for future earnings and dividends.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Hong Leong Asia's dividend payments per share have declined at 4.0% per year on average over the past 10 years, which is uninspiring. Hong Leong Asia is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.

To Sum It Up

Should investors buy Hong Leong Asia for the upcoming dividend? Earnings per share have been growing moderately, and Hong Leong Asia is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Hong Leong Asia is halfway there. Hong Leong Asia looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

While it's tempting to invest in Hong Leong Asia for the dividends alone, you should always be mindful of the risks involved. For example - Hong Leong Asia has 1 warning sign we think 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.