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Why It Might Not Make Sense To Buy Chu Kong Shipping Enterprises (Group) Company Limited (HKG:560) For Its Upcoming Dividend

Simply Wall St

Chu Kong Shipping Enterprises (Group) Company Limited (HKG:560) is about to trade ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 16th of September will not receive the dividend, which will be paid on the 15th of October.

Chu Kong Shipping Enterprises (Group)'s upcoming dividend is HK$0.03 a share, following on from the last 12 months, when the company distributed a total of HK$0.09 per share to shareholders. Based on the last year's worth of payments, Chu Kong Shipping Enterprises (Group) has a trailing yield of 6.9% on the current stock price of HK$1.31. If you buy this business for its dividend, you should have an idea of whether Chu Kong Shipping Enterprises (Group)'s dividend is reliable and sustainable. As a result, readers should always check whether Chu Kong Shipping Enterprises (Group) has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Chu Kong Shipping Enterprises (Group)

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Chu Kong Shipping Enterprises (Group) paid out more than half (56%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether Chu Kong Shipping Enterprises (Group) generated enough free cash flow to afford its dividend. Chu Kong Shipping Enterprises (Group) paid out more free cash flow than it generated - 156%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Chu Kong Shipping Enterprises (Group) 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 Chu Kong Shipping Enterprises (Group)'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 Chu Kong Shipping Enterprises (Group)'s ability to maintain its dividend.

Click here to see how much of its profit Chu Kong Shipping Enterprises (Group) paid out over the last 12 months.

SEHK:560 Historical Dividend Yield, September 11th 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see Chu Kong Shipping Enterprises (Group)'s earnings per share have dropped 5.4% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Chu Kong Shipping Enterprises (Group) has delivered an average of 4.1% per year annual increase in its dividend, based on the past 10 years of dividend payments. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.

Final Takeaway

From a dividend perspective, should investors buy or avoid Chu Kong Shipping Enterprises (Group)? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Keen to explore more data on Chu Kong Shipping Enterprises (Group)'s financial performance? Check out our visualisation of its historical revenue and earnings growth.

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.