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Don't Buy Yue Yuen Industrial (Holdings) Limited (HKG:551) For Its Next Dividend Without Doing These Checks

Simply Wall St

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Yue Yuen Industrial (Holdings) Limited (HKG:551) is about to trade ex-dividend in the next 3 days. You can purchase shares before the 12th of September in order to receive the dividend, which the company will pay on the 10th of October.

The upcoming dividend for Yue Yuen Industrial (Holdings) will put a total of HK$0.40 per share in shareholders' pockets, up from last year's total dividends of HK$0.19. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Yue Yuen Industrial (Holdings) has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Yue Yuen Industrial (Holdings)

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. Yue Yuen Industrial (Holdings) paid out 96% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. 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 150% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

As Yue Yuen Industrial (Holdings)'s dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

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

SEHK:551 Historical Dividend Yield, September 8th 2019

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. Readers will understand then, why we're concerned to see Yue Yuen Industrial (Holdings)'s earnings per share have dropped 5.4% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Yue Yuen Industrial (Holdings) has increased its dividend at approximately 5.2% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Yue Yuen Industrial (Holdings) is already paying out 96% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Has Yue Yuen Industrial (Holdings) got what it takes to maintain its dividend payments? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (96%) and cash flow (150%) as dividends. This is a clearly suboptimal combination that usually suggests the dividend is at risk of being cut. If not now, then perhaps in the future. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Yue Yuen Industrial (Holdings).

Wondering what the future holds for Yue Yuen Industrial (Holdings)? See what the six analysts we track 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.