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Why It Might Not Make Sense To Buy Associated International Hotels Limited (HKG:105) For Its Upcoming Dividend

Simply Wall St

Associated International Hotels Limited (HKG:105) stock is about to trade ex-dividend in 3 days time. You will need to purchase shares before the 12th of September to receive the dividend, which will be paid on the 2nd of October.

Associated International Hotels's upcoming dividend is HK$0.57 a share, following on from the last 12 months, when the company distributed a total of HK$1.14 per share to shareholders. Calculating the last year's worth of payments shows that Associated International Hotels has a trailing yield of 5.1% on the current share price of HK$22.5. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for Associated International Hotels

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. Associated International Hotels paid out a disturbingly high 279% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. 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. It paid out 102% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

As Associated International Hotels's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

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

SEHK:105 Historical Dividend Yield, September 8th 2019

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. Associated International Hotels's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 36% a year over 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. In the past 8 years, Associated International Hotels has increased its dividend at approximately 12% a year on average. 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. Associated International Hotels is already paying out 279% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Is Associated International Hotels an attractive dividend stock, or better left on the shelf? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (279%) and cash flow (102%) as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. Bottom line: Associated International Hotels has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Keen to explore more data on Associated International Hotels's financial performance? Check out our visualisation of its historical revenue and earnings growth.

If you're in the market for dividend stocks, we recommend checking our list of top 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.