Perfect Shape Medical Limited (HKG:1830) is about to trade ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 19th of August will not receive this dividend, which will be paid on the 13th of September.
Perfect Shape Medical's next dividend payment will be HK$0.19 per share. Last year, in total, the company distributed HK$0.29 to shareholders. Based on the last year's worth of payments, Perfect Shape Medical stock has a trailing yield of around 8.4% on the current share price of HK$3.45. If you buy this business for its dividend, you should have an idea of whether Perfect Shape Medical's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year Perfect Shape Medical paid out 100% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the last year it paid out 68% of its free cash flow as dividends, within the usual range for most companies.
It's good to see that while Perfect Shape Medical's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.
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 Perfect Shape Medical's earnings have been skyrocketing, up 28% per annum for the past five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 7 years ago, Perfect Shape Medical has lifted its dividend by approximately 42% a year on average. 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
Is Perfect Shape Medical an attractive dividend stock, or better left on the shelf? Perfect Shape Medical has been growing its earnings per share nicely, although judging by the difference between its profit and cashflow payout ratios, the company might have reported some write-offs over the last year. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.
Keen to explore more data on Perfect Shape Medical's financial performance? Check out our visualisation 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.
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