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Do These 3 Checks Before Buying Lung Kee (Bermuda) Holdings Limited (HKG:255) For Its Upcoming Dividend

Simply Wall St

It looks like Lung Kee (Bermuda) Holdings Limited (HKG:255) is about to go ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 10th of September will not receive the dividend, which will be paid on the 26th of September.

Lung Kee (Bermuda) Holdings's next dividend payment will be HK$0.11 per share, on the back of last year when the company paid a total of HK$0.24 to shareholders. Calculating the last year's worth of payments shows that Lung Kee (Bermuda) Holdings has a trailing yield of 8.7% on the current share price of HK$2.52. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Lung Kee (Bermuda) Holdings

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Lung Kee (Bermuda) Holdings distributed an unsustainably high 124% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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 distributed 49% of its free cash flow as dividends, a comfortable payout level for most companies.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Lung Kee (Bermuda) Holdings fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit Lung Kee (Bermuda) Holdings paid out over the last 12 months.

SEHK:255 Historical Dividend Yield, September 5th 2019

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's not ideal to see Lung Kee (Bermuda) Holdings's earnings per share have been shrinking at 4.3% a year over the previous five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Lung Kee (Bermuda) Holdings's dividend payments are effectively flat on where they were ten years ago. If a company's dividend stays flat while earnings are in decline, this is typically a sign that it is paying out a larger percentage of its earnings. This can become unsustainable if earnings fall far enough.

Final Takeaway

Is Lung Kee (Bermuda) Holdings an attractive dividend stock, or better left on the shelf? It's never great to see earnings per share declining, especially when a company is paying out 124% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Lung Kee (Bermuda) Holdings.

Keen to explore more data on Lung Kee (Bermuda) Holdings's financial performance? Check out our visualisation of its historical revenue and earnings growth.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.