U.S. Markets closed

Is It Smart To Buy Haw Par Corporation Limited (SGX:H02) Before It Goes Ex-Dividend?

Simply Wall St

It looks like Haw Par Corporation Limited (SGX:H02) is about to go ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 20th of August will not receive this dividend, which will be paid on the 4th of September.

Haw Par's next dividend payment will be S$0.15 per share, on the back of last year when the company paid a total of S$0.30 to shareholders. Looking at the last 12 months of distributions, Haw Par has a trailing yield of approximately 2.1% on its current stock price of SGD14. If you buy this business for its dividend, you should have an idea of whether Haw Par'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.

Check out our latest analysis for Haw Par

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Haw Par paid out a comfortable 35% of its profit last year. 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 last year, it paid out dividends equivalent to 326% of what it generated in free cash flow, a disturbingly high percentage. Our definition of free cash flow excludes cash generated from asset sales, so since Haw Par is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.

Haw Par does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

While Haw Par'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. Were this to happen repeatedly, this would be a risk to Haw Par's ability to maintain its dividend.

Click here to see how much of its profit Haw Par paid out over the last 12 months.

SGX:H02 Historical Dividend Yield, August 15th 2019

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. For this reason, we're glad to see Haw Par's earnings per share have risen 12% per annum over the last five years. Earnings have been growing at a decent rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, Haw Par has increased its dividend at approximately 5.1% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Haw Par is keeping back more of its profits to grow the business.

Final Takeaway

Has Haw Par got what it takes to maintain its dividend payments? 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. In summary, it's hard to get excited about Haw Par from a dividend perspective.

Curious about whether Haw Par 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.