Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Carpenter Tan Holdings Limited (HKG:837) is about to trade ex-dividend in the next 4 days. If you purchase the stock on or after the 13th of January, you won't be eligible to receive this dividend, when it is paid on the 28th of February.
The upcoming dividend for Carpenter Tan Holdings will put a total of HK$0.67 per share in shareholders' pockets, up from last year's total dividends of HK$0.44. 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 check whether the dividend payments are covered, and if earnings are 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. Carpenter Tan Holdings paid out a comfortable 46% of its profit last year. A useful secondary check can be to evaluate whether Carpenter Tan Holdings generated enough free cash flow to afford its dividend. Dividends consumed 68% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. 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 explains why we're not overly excited about Carpenter Tan Holdings's flat earnings over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past ten years, Carpenter Tan Holdings has increased its dividend at approximately 9.9% a year on average.
To Sum It Up
Is Carpenter Tan Holdings worth buying for its dividend? Earnings per share are down very slightly in recent times, and Carpenter Tan Holdings paid out less half its profit and more than half its cash flow as dividends, which is not the worst combination but could be better. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Carpenter Tan Holdings's dividend merits.
Want to learn more about Carpenter Tan Holdings's dividend performance? Check out this visualisation of its historical revenue and earnings growth.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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