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Why You Should Leave The Hong Kong and China Gas Company Limited (HKG:3)'s Upcoming Dividend On The Shelf

Simply Wall St

The Hong Kong and China Gas Company Limited (HKG:3) is about to trade ex-dividend in the next 4 days. You will need to purchase shares before the 10th of September to receive the dividend, which will be paid on the 2nd of October.

Hong Kong and China Gas's next dividend payment will be HK$0.12 per share. Last year, in total, the company distributed HK$0.33 to shareholders. Calculating the last year's worth of payments shows that Hong Kong and China Gas has a trailing yield of 2.1% on the current share price of HK$15.36. 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! As a result, readers should always check whether Hong Kong and China Gas has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Hong Kong and China Gas

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. Hong Kong and China Gas paid out more than half (66%) of its earnings last year, which is a regular payout ratio for most companies. 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. Hong Kong and China Gas paid out more free cash flow than it generated - 176%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Hong Kong and China Gas paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Hong Kong and China Gas to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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

SEHK:3 Historical Dividend Yield, September 5th 2019

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. With that in mind, we're encouraged by the steady growth at Hong Kong and China Gas, with earnings per share up 4.2% on average over the last five years. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Hong Kong and China Gas has lifted its dividend by approximately 10.0% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

To Sum It Up

Should investors buy Hong Kong and China Gas for the upcoming dividend? Earnings per share have grown somewhat, although Hong Kong and China Gas paid out over half its profits and the dividend was not well covered by free cash flow. 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 Hong Kong and China Gas? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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.