Dream International Limited (HKG:1126) is about to trade ex-dividend in the next four days. The ex-dividend date generally occurs two days before the record date, which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. Therefore, if you purchase Dream International's shares on or after the 28th of September, you won't be eligible to receive the dividend, when it is paid on the 15th of October.
The company's next dividend payment will be HK$0.25 per share, on the back of last year when the company paid a total of HK$0.60 to shareholders. Based on the last year's worth of payments, Dream International stock has a trailing yield of around 9.7% on the current share price of HK$6.18. If you buy this business for its dividend, you should have an idea of whether Dream International's dividend is reliable and sustainable. So we need to investigate whether Dream International can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Dream International paid out more than half (69%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether Dream International generated enough free cash flow to afford its dividend. Dream International paid out more free cash flow than it generated - 157%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
Dream International 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.
Dream International 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 Dream International to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
Check out our latest analysis for Dream International
Click here to see how much of its profit Dream International paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. Fortunately for readers, Dream International's earnings per share have been growing at 17% a year for the past five years. Earnings have been growing at a decent rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
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, 10 years ago, Dream International has lifted its dividend by approximately 41% a year on average. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
Final Takeaway
Should investors buy Dream International for the upcoming dividend? Earnings per share growth is a positive, and the company's payout ratio looks normal. However, we note Dream International paid out a much higher percentage of its free cash flow, which makes us uncomfortable. In summary, it's hard to get excited about Dream International from a dividend perspective.
With that being said, if dividends aren't your biggest concern with Dream International, you should know about the other risks facing this business. For example, we've found 1 warning sign for Dream International that we recommend you consider before investing in the business.
If you're in the market for strong dividend payers, we recommend checking our selection of top 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.