Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see The Hong Kong and China Gas Company Limited (HKG:3) is about to trade ex-dividend in the next 4 days. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Meaning, you will need to purchase Hong Kong and China Gas' shares before the 31st of August to receive the dividend, which will be paid on the 11th of September.
The company's upcoming dividend is HK$0.12 a share, following on from the last 12 months, when the company distributed a total of HK$0.35 per share to shareholders. Looking at the last 12 months of distributions, Hong Kong and China Gas has a trailing yield of approximately 4.8% on its current stock price of HK$7.355. If you buy this business for its dividend, you should have an idea of whether Hong Kong and China Gas's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
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. Last year Hong Kong and China Gas paid out 103% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Hong Kong and China Gas paid out more free cash flow than it generated - 120%, 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.
Cash is slightly more important than profit from a dividend perspective, but given Hong Kong and China Gas's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
Check out our latest analysis for Hong Kong and China Gas
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings fall far enough, the company could be forced to cut its dividend. It's not encouraging to see that Hong Kong and China Gas's earnings are effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. Minimal earnings growth, combined with concerningly high payout ratios suggests that Hong Kong and China Gas is unlikely to grow the dividend much in future, and indeed the payment could be vulnerable to a cut.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Hong Kong and China Gas has lifted its dividend by approximately 4.9% a year on average.
To Sum It Up
Should investors buy Hong Kong and China Gas for the upcoming dividend? Earnings per share are effectively flat, plus Hong Kong and China Gas's dividend is not well covered by either earnings or cash flow, which is not great. It's not that we think Hong Kong and China Gas is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Hong Kong and China Gas. For example, we've found 2 warning signs for Hong Kong and China Gas that we recommend you consider before investing in the business.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.