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We Wouldn't Be Too Quick To Buy Tai Cheung Holdings Limited (HKG:88) Before It Goes Ex-Dividend

Simply Wall St

Readers hoping to buy Tai Cheung Holdings Limited (HKG:88) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You can purchase shares before the 3rd of September in order to receive the dividend, which the company will pay on the 18th of September.

Tai Cheung Holdings's next dividend payment will be HK$0.23 per share, and in the last 12 months, the company paid a total of HK$0.35 per share. Last year's total dividend payments show that Tai Cheung Holdings has a trailing yield of 5.3% on the current share price of HK$6.55. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Tai Cheung Holdings

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year Tai Cheung Holdings paid out 93% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. A useful secondary check can be to evaluate whether Tai Cheung Holdings generated enough free cash flow to afford its dividend. Fortunately, it paid out only 44% of its free cash flow in the past year.

It's good to see that while Tai Cheung Holdings's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

Click here to see how much of its profit Tai Cheung Holdings paid out over the last 12 months.

SEHK:88 Historical Dividend Yield, August 29th 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. Tai Cheung Holdings's earnings per share have fallen at approximately 26% a year over the previous 5 years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Tai Cheung Holdings has lifted its dividend by approximately 4.3% 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. Tai Cheung Holdings is already paying out 93% 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

From a dividend perspective, should investors buy or avoid Tai Cheung Holdings? It's never great to see earnings per share declining, especially when a company is paying out 93% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Want to learn more about Tai Cheung Holdings's dividend performance? Check out this 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.