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Why You Should Leave International Housewares Retail Company Limited (HKG:1373)'s Upcoming Dividend On The Shelf

Simply Wall St

Readers hoping to buy International Housewares Retail Company Limited (HKG:1373) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 27th of September to receive the dividend, which will be paid on the 18th of October.

International Housewares Retail's next dividend payment will be HK$0.09 per share, on the back of last year when the company paid a total of HK$0.1 to shareholders. Looking at the last 12 months of distributions, International Housewares Retail has a trailing yield of approximately 7.2% on its current stock price of HK$2. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for International Housewares Retail

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Its dividend payout ratio is 86% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth We'd be concerned if earnings began to decline. 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. International Housewares Retail paid out more free cash flow than it generated - 143%, 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.

International Housewares Retail 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 International Housewares Retail'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 International Housewares Retail to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see how much of its profit International Housewares Retail paid out over the last 12 months.

SEHK:1373 Historical Dividend Yield, September 23rd 2019

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by International Housewares Retail's 5.7% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. International Housewares Retail has delivered 24% dividend growth per year on average over the past six years. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. International Housewares Retail is already paying out 86% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

The Bottom Line

Should investors buy International Housewares Retail for the upcoming dividend? International Housewares Retail had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. Bottom line: International Housewares Retail has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Want to learn more about International Housewares Retail's dividend performance? Check out this 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.

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.