It looks like Xtep International Holdings Limited (HKG:1368) 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 25th of October.
Xtep International Holdings's next dividend payment will be CN¥0.13 per share. Last year, in total, the company distributed CN¥0.17 to shareholders. Last year's total dividend payments show that Xtep International Holdings has a trailing yield of 4.3% on the current share price of HK$4.5. If you buy this business for its dividend, you should have an idea of whether Xtep International Holdings's dividend is reliable and sustainable. So we need to investigate whether Xtep International Holdings can afford its dividend, and if the dividend could grow.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Xtep International Holdings paid out 58% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Xtep International Holdings generated enough free cash flow to afford its dividend. It paid out an unsustainably high 205% of its free cash flow as dividends over the past 12 months, which is worrying. It's pretty hard to pay out more than you earn, so we wonder how Xtep International Holdings intends to continue funding this dividend, or if it could be forced to the payment.
Xtep International Holdings 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.
Xtep International Holdings paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Xtep International Holdings to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Xtep International Holdings, with earnings per share up 3.7% on average over the last five years. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
We'd also point out that Xtep International Holdings issued a meaningful number of new shares in the past year. It's hard to grow dividends per share when a company keeps creating new shares.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Xtep International Holdings has delivered 7.1% dividend growth per year on average over the past 10 years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
The Bottom Line
Is Xtep International Holdings worth buying for its dividend? Xtep International Holdings is paying out a reasonable percentage of its income and an uncomfortably high 205% of its cash flow as dividends. At least earnings per share have been growing steadily. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.
Curious what other investors think of Xtep International Holdings? See what analysts 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 firstname.lastname@example.org. 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.