Readers hoping to buy Hong Kong Economic Times Holdings Limited (HKG:423) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. 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. Thus, you can purchase Hong Kong Economic Times Holdings’ shares before the 10th of August in order to receive the dividend, which the company will pay on the 8th of September.

The company’s next dividend payment will be HK$0.07 per share, and in the last 12 months, the company paid a total of HK$0.10 per share. Last year’s total dividend payments show that Hong Kong Economic Times Holdings has a trailing yield of 8.5% on the current share price of HK$1.17. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Hong Kong Economic Times Holdings can afford its dividend, and if the dividend could grow.

See our latest analysis for Hong Kong Economic Times Holdings

If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Hong Kong Economic Times Holdings distributed an unsustainably high 157% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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. Over the last year, it paid out more than three-quarters (81%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It’s good to see that while Hong Kong Economic Times Holdings’s dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we’d be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit Hong Kong Economic Times Holdings paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we’re concerned to see Hong Kong Economic Times Holdings’s earnings per share have dropped 17% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Hong Kong Economic Times Holdings has delivered 5.2% 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 Economic Times Holdings is already paying out 157% of its profits, and with shrinking earnings we think it’s unlikely that this dividend will grow quickly in the future.

Final Takeaway

Is Hong Kong Economic Times Holdings an attractive dividend stock, or better left on the shelf? It’s never fun to see a company’s earnings per share in retreat. What’s more, Hong Kong Economic Times Holdings is paying out a majority of its earnings and over half its free cash flow. It’s hard to say if the business has the financial resources and time to turn things around without cutting the dividend. It’s not an attractive combination from a dividend perspective, and we’re inclined to pass on this one for the time being.

Although, if you’re still interested in Hong Kong Economic Times Holdings and want to know more, you’ll find it very useful to know what risks this stock faces. For example, we’ve found 4 warning signs for Hong Kong Economic Times Holdings (1 is significant!) that deserve your attention before investing in the shares.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.