Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that China High Speed Transmission Equipment Group Co., Ltd. (HKG:658) is about to go ex-dividend in just 4 days. This means that investors who purchase shares on or after the 26th of May will not receive the dividend, which will be paid on the 12th of June.
China High Speed Transmission Equipment Group's next dividend payment will be HK$0.20 per share, which looks like a nice increase on last year, when the company distributed a total of HK$0.18 to shareholders. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether China High Speed Transmission Equipment Group has been able to grow its dividends, or if the dividend might be cut.
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. It paid out 78% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be worried about the risk of a drop in earnings. 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 7.2% of its cash flow last year.
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 with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. For this reason, we're glad to see China High Speed Transmission Equipment Group's earnings per share have risen 12% per annum over the last five years. It paid out more than three-quarters of its earnings in the last year, even though earnings per share are growing rapidly. We're surprised that management has not elected to reinvest more in the business to accelerate growth further.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. China High Speed Transmission Equipment Group's dividend payments per share have declined at 3.2% per year on average over the past ten years, which is uninspiring. China High Speed Transmission Equipment Group is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
Should investors buy China High Speed Transmission Equipment Group for the upcoming dividend? We like China High Speed Transmission Equipment Group's growing earnings per share and the fact that - while its payout ratio is around average - it paid out a lower percentage of its cash flow. Overall we think this is an attractive combination and worthy of further research.
While it's tempting to invest in China High Speed Transmission Equipment Group for the dividends alone, you should always be mindful of the risks involved. We've identified 2 warning signs with China High Speed Transmission Equipment Group (at least 1 which is significant), and understanding them should be part of your investment process.
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.
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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. 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. Thank you for reading.