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It Might Be Better To Avoid CLP Holdings Limited's (HKG:2) Upcoming 0.8% Dividend

Simply Wall St

CLP Holdings Limited (HKG:2) stock is about to trade ex-dividend in 4 days time. This means that investors who purchase shares on or after the 2nd of September will not receive the dividend, which will be paid on the 13th of September.

CLP Holdings's next dividend payment will be HK$0.63 per share, and in the last 12 months, the company paid a total of HK$3.02 per share. Based on the last year's worth of payments, CLP Holdings stock has a trailing yield of around 3.8% on the current share price of HK$79.55. 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.

Check out our latest analysis for CLP Holdings

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. CLP Holdings paid out 148% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. A useful secondary check can be to evaluate whether CLP Holdings generated enough free cash flow to afford its dividend. It paid out 85% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and CLP Holdings fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

SEHK:2 Historical Dividend Yield, August 28th 2019

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. So we're not too excited that CLP Holdings's earnings are down 3.0% a year over the past five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. CLP Holdings has delivered 2.0% dividend growth per year on average over the past 10 years.

Final Takeaway

Is CLP Holdings an attractive dividend stock, or better left on the shelf? Earnings per share have been in decline, which is not encouraging. Worse, CLP Holdings's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

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

If you're in the market for dividend stocks, we recommend checking our list of top 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.