Should Income Investors Look At Haw Par Corporation Limited (SGX:H02) Before Its Ex-Dividend?

Readers hoping to buy Haw Par Corporation Limited (SGX:H02) 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 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Therefore, if you purchase Haw Par's shares on or after the 21st of August, you won't be eligible to receive the dividend, when it is paid on the 7th of September.

The company's next dividend payment will be S$0.20 per share, on the back of last year when the company paid a total of S$0.40 to shareholders. Last year's total dividend payments show that Haw Par has a trailing yield of 4.1% on the current share price of SGD9.74. If you buy this business for its dividend, you should have an idea of whether Haw Par's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for Haw Par

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. Fortunately Haw Par's payout ratio is modest, at just 44% of profit. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out an unsustainably high 286% of its free cash flow as dividends over the past 12 months, which is worrying. Our definition of free cash flow excludes cash generated from asset sales, so since Haw Par is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.

Haw Par does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

Haw Par 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 Haw Par to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see how much of its profit Haw Par 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. This is why it's a relief to see Haw Par earnings per share are up 7.3% per annum over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Haw Par has increased its dividend at approximately 8.2% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

The Bottom Line

Has Haw Par got what it takes to maintain its dividend payments? Haw Par delivered reasonable earnings per share growth in recent times, and paid out less than half its profits and 286% of its cash flow over the last year, which is a mediocre outcome. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Haw Par's dividend merits.

With that being said, if dividends aren't your biggest concern with Haw Par, you should know about the other risks facing this business. For example, we've found 2 warning signs for Haw Par (1 makes us a bit uncomfortable!) that deserve your attention before investing in the 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.