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Don't Race Out To Buy Sitoy Group Holdings Limited (HKG:1023) Just Because It's Going Ex-Dividend

Simply Wall St

Readers hoping to buy Sitoy Group Holdings Limited (HKG:1023) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You can purchase shares before the 15th of November in order to receive the dividend, which the company will pay on the 13th of December.

Sitoy Group Holdings's next dividend payment will be HK$0.02 per share, on the back of last year when the company paid a total of HK$0.08 to shareholders. Based on the last year's worth of payments, Sitoy Group Holdings stock has a trailing yield of around 6.4% on the current share price of HK$1.25. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Sitoy Group Holdings

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Sitoy Group Holdings paid out more than half (62%) of its earnings last year, which is a regular payout ratio for most companies. 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. It paid out more than half (62%) of its free cash flow in the past year, which is within an average range for most companies.

It's positive to see that Sitoy Group 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.

Click here to see how much of its profit Sitoy Group Holdings paid out over the last 12 months.

SEHK:1023 Historical Dividend Yield, November 11th 2019

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Sitoy Group Holdings's earnings per share have fallen at approximately 24% a year over the previous 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. Sitoy Group Holdings has seen its dividend decline 12% per annum on average over the past seven years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

The Bottom Line

Has Sitoy Group Holdings got what it takes to maintain its dividend payments? While earnings per share are shrinking, it's encouraging to see that at least Sitoy Group Holdings's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Curious about whether Sitoy Group Holdings has been able to consistently generate growth? Here's a chart 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.

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.