Readers hoping to buy China MeiDong Auto Holdings Limited (HKG:1268) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 18th of November to receive the dividend, which will be paid on the 5th of December.
China MeiDong Auto Holdings's upcoming dividend is HK$0.06 a share, following on from the last 12 months, when the company distributed a total of HK$0.1 per share to shareholders. Looking at the last 12 months of distributions, China MeiDong Auto Holdings has a trailing yield of approximately 2.0% on its current stock price of HK$8.03. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. That's why it's good to see China MeiDong Auto Holdings paying out a modest 38% of its earnings. 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. Luckily it paid out just 19% of its free cash flow last year.
It's positive to see that China MeiDong Auto Holdings'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?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's comforting to see China MeiDong Auto Holdings's earnings have been skyrocketing, up 23% per annum for the past five years. China MeiDong Auto Holdings is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. Companies with growing earnings and low payout ratios are often the best long-term dividend stocks, as the company can both grow its earnings and increase the percentage of earnings that it pays out, essentially multiplying the dividend.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. China MeiDong Auto Holdings has delivered 30% dividend growth per year on average over the past six years. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
The Bottom Line
Should investors buy China MeiDong Auto Holdings for the upcoming dividend? We love that China MeiDong Auto Holdings is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. There's a lot to like about China MeiDong Auto Holdings, and we would prioritise taking a closer look at it.
Curious what other investors think of China MeiDong Auto Holdings? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.
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.
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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. Thank you for reading.