U.S. Markets open in 8 hrs 52 mins

Don't Buy NWS Holdings Limited (HKG:659) For Its Next Dividend Without Doing These Checks

Simply Wall St

It looks like NWS Holdings Limited (HKG:659) is about to go ex-dividend in the next 4 days. You will need to purchase shares before the 20th of November to receive the dividend, which will be paid on the 11th of December.

NWS Holdings's next dividend payment will be HK$0.29 per share, and in the last 12 months, the company paid a total of HK$0.58 per share. Last year's total dividend payments show that NWS Holdings has a trailing yield of 5.1% on the current share price of HK$11.26. 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 NWS Holdings has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for NWS Holdings

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. NWS Holdings paid out 56% of its earnings to investors last year, a normal payout level for most businesses. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the past year it paid out 199% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

While NWS Holdings's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to NWS Holdings's ability to maintain its dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

SEHK:659 Historical Dividend Yield, November 15th 2019

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. So we're not too excited that NWS Holdings's earnings are down 2.4% a year over the past five years.

NWS Holdings also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last ten years, NWS Holdings has lifted its dividend by approximately 8.1% a year on average. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.

The Bottom Line

Is NWS Holdings an attractive dividend stock, or better left on the shelf? NWS Holdings had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. Bottom line: NWS Holdings has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Curious what other investors think of NWS Holdings? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.

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.