Don't Buy Truly International Holdings Limited (HKG:732) For Its Next Dividend Without Doing These Checks

It looks like Truly International Holdings Limited (HKG:732) is about to go ex-dividend in the next 3 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 important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. In other words, investors can purchase Truly International Holdings' shares before the 30th of October in order to be eligible for the dividend, which will be paid on the 1st of December.

The company's upcoming dividend is HK$0.03 a share, following on from the last 12 months, when the company distributed a total of HK$0.06 per share to shareholders. Based on the last year's worth of payments, Truly International Holdings stock has a trailing yield of around 7.2% on the current share price of HK$0.835. 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! So we need to investigate whether Truly International Holdings can afford its dividend, and if the dividend could grow.

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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, Truly International Holdings paid out 101% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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. What's good is that dividends were well covered by free cash flow, with the company paying out 6.5% of its cash flow last year.

It's good to see that while Truly International Holdings's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

See our latest analysis for Truly International Holdings

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Truly International Holdings's earnings per share have fallen at approximately 12% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Truly International Holdings's dividend payments per share have declined at 5.0% per year on average over the past 10 years, which is uninspiring. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

To Sum It Up

From a dividend perspective, should investors buy or avoid Truly International Holdings? It's never great to see earnings per share declining, especially when a company is paying out 101% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Truly International Holdings's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Truly International Holdings.

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 Truly International Holdings. Our analysis shows 4 warning signs for Truly International Holdings that we strongly recommend you have a look at before investing in the company.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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