Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see HK Electric Investments and HK Electric Investments Limited (HKG:2638) is about to trade ex-dividend in the next 4 days. Investors can purchase shares before the 13th of August in order to be eligible for this dividend, which will be paid on the 23rd of August.
HK Electric Investments and HK Electric Investments's next dividend payment will be HK$0.16 per share. Last year, in total, the company distributed HK$0.36 to shareholders. Last year's total dividend payments show that HK Electric Investments and HK Electric Investments has a trailing yield of 4.6% on the current share price of HK$7.9. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether HK Electric Investments and HK Electric Investments can afford its dividend, and if the dividend could grow.
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. HK Electric Investments and HK Electric Investments paid out 115% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. 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. Over the last year, it paid out dividends equivalent to 240% of what it generated in free cash flow, a disturbingly high percentage. Our definition of free cash flow excludes cash generated from asset sales, so since HK Electric Investments and HK Electric Investments is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.
As HK Electric Investments and HK Electric Investments'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.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see HK Electric Investments and HK Electric Investments's earnings per share have dropped 12% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 5 years ago, HK Electric Investments and HK Electric Investments has lifted its dividend by approximately 1.8% a year on average.
Should investors buy HK Electric Investments and HK Electric Investments for the upcoming dividend? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (115%) and cash flow (240%) as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
Ever wonder what the future holds for HK Electric Investments and HK Electric Investments? See what the eight analysts we track 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 email@example.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.