Times China Holdings Limited (HKG:1233) is about to trade ex-dividend in the next 4 days. Investors can purchase shares before the 19th of May in order to be eligible for this dividend, which will be paid on the 2nd of July.
Times China Holdings's upcoming dividend is HK$0.84 a share, following on from the last 12 months, when the company distributed a total of HK$0.84 per share to shareholders. Looking at the last 12 months of distributions, Times China Holdings has a trailing yield of approximately 7.4% on its current stock price of HK$12.54. 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 investigate whether Times China Holdings can afford its dividend, and if the dividend could grow.
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. Fortunately Times China Holdings's payout ratio is modest, at just 31% of profit. A useful secondary check can be to evaluate whether Times China Holdings generated enough free cash flow to afford its dividend. Over the last year, it paid out dividends equivalent to 231% of what it generated in free cash flow, a disturbingly high percentage. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.
While Times China 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. Cash is king, as they say, and were Times China Holdings to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see Times China Holdings has grown its earnings rapidly, up 30% a year for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
We'd also point out that Times China Holdings issued a meaningful number of new shares in the past year. It's hard to grow dividends per share when a company keeps creating new shares.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past six years, Times China Holdings has increased its dividend at approximately 41% 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.
To Sum It Up
Is Times China Holdings an attractive dividend stock, or better left on the shelf? We're glad to see the company has been improving its earnings per share while also paying out a low percentage of income. However, it's not great to see it paying out what we see as an uncomfortably high percentage of its cash flow. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.
With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. Every company has risks, and we've spotted 3 warning signs for Times China Holdings (of which 1 is a bit unpleasant!) you should know about.
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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