Rykadan Capital Limited (HKG:2288) stock is about to trade ex-dividend in 4 days time. Ex-dividend means that investors that purchase the stock on or after the 30th of September will not receive this dividend, which will be paid on the 11th of October.
Rykadan Capital's next dividend payment will be HK$0.06 per share. Last year, in total, the company distributed HK$0.06 to shareholders. Last year's total dividend payments show that Rykadan Capital has a trailing yield of 8.5% on the current share price of HK$0.71. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
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. Rykadan Capital has a low and conservative payout ratio of just 8.7% of its income after tax. 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. What's good is that dividends were well covered by free cash flow, with the company paying out 3.5% of its cash flow last year.
It's positive to see that Rykadan Capital'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.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's not ideal to see Rykadan Capital's earnings per share have been shrinking at 3.9% 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. Rykadan Capital has seen its dividend decline 9.9% per annum on average over the past ten years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.
The Bottom Line
From a dividend perspective, should investors buy or avoid Rykadan Capital? Rykadan Capital has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. In summary, while it has some positive characteristics, we're not inclined to race out and buy Rykadan Capital today.
Want to learn more about Rykadan Capital's dividend performance? Check out this visualisation of its historical revenue and earnings growth.
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