Don’t Race Out To Buy The Hong Kong and China Gas Company Limited (HKG:3) Just Because It’s Going Ex-Dividend

The Hong Kong and China Gas Company Limited (HKG:3) stock is about to trade ex-dividend in 3 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 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. Meaning, you will need to purchase Hong Kong and China Gas’ shares before the 9th of June to receive the dividend, which will be paid on the 26th of June.

The company’s next dividend payment will be HK$0.23 per share, on the back of last year when the company paid a total of HK$0.35 to shareholders. Based on the last year’s worth of payments, Hong Kong and China Gas has a trailing yield of 4.9% on the current stock price of HK$7.21. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Hong Kong and China Gas

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Hong Kong and China Gas paid out 124% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. 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 343% of what it generated in free cash flow, a disturbingly high percentage. Unless there were something in the business we’re not grasping, this could signal a risk that the dividend may have to be cut in the future.

As Hong Kong and China Gas’s dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we’re discomforted by Hong Kong and China Gas’s 8.6% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Hong Kong and China Gas has delivered 7.9% dividend growth per year on average over the past 10 years. 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. Hong Kong and China Gas 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.

The Bottom Line

From a dividend perspective, should investors buy or avoid Hong Kong and China Gas? It’s looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (124%) and cash flow as dividends. This is a clearly suboptimal combination that usually suggests the dividend is at risk of being cut. If not now, then perhaps in the future. With the way things are shaping up from a dividend perspective, we’d be inclined to steer clear of Hong Kong and China Gas.

So if you’re still interested in Hong Kong and China Gas despite it’s poor dividend qualities, you should be well informed on some of the risks facing this stock. For example – Hong Kong and China Gas has 2 warning signs we think you should be aware of.

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.