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We Wouldn't Be Too Quick To Buy Henderson Investment Limited (HKG:97) Before It Goes Ex-Dividend

Simply Wall St

It looks like Henderson Investment Limited (HKG:97) is about to go ex-dividend in the next 4 days. You will need to purchase shares before the 3rd of September to receive the dividend, which will be paid on the 12th of September.

Henderson Investment's upcoming dividend is HK$0.02 a share, following on from the last 12 months, when the company distributed a total of HK$0.04 per share to shareholders. Based on the last year's worth of payments, Henderson Investment has a trailing yield of 6.1% on the current stock price of HK$0.66. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Henderson Investment

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Henderson Investment distributed an unsustainably high 174% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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 94% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.

As Henderson Investment'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 Henderson Investment paid out over the last 12 months.

SEHK:97 Historical Dividend Yield, August 29th 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. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's encouraging to see Henderson Investment has grown its earnings rapidly, up 48% a year for the past five years. Henderson Investment's dividend was not well covered by earnings, although at least its earnings per share are growing quickly. Fast-growing businesses normally need to reinvest most of their earnings in order to maintain growth, so we'd suspect that either earnings growth will slow or the dividend may not be increased for a while.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Henderson Investment's dividend payments are broadly unchanged compared to where they were ten years ago.

Final Takeaway

Is Henderson Investment worth buying for its dividend? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Want to learn more about Henderson Investment? Here's a visualisation of its historical rate of 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.