Don't Race Out To Buy Kowloon Development Company Limited (HKG:34) Just Because It's Going Ex-Dividend
Kowloon Development Company Limited (HKG:34) stock is about to trade ex-dividend in 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. Thus, you can purchase Kowloon Development's shares before the 11th of June in order to receive the dividend, which the company will pay on the 8th of July.
The company's next dividend payment will be HK$0.14 per share. Last year, in total, the company distributed HK$0.24 to shareholders. Looking at the last 12 months of distributions, Kowloon Development has a trailing yield of approximately 4.6% on its current stock price of HK$5.19. If you buy this business for its dividend, you should have an idea of whether Kowloon Development's dividend is reliable and sustainable. So we need to investigate whether Kowloon Development can afford its dividend, and if the dividend could grow.
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. Kowloon Development paid out a disturbingly high 240% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. A useful secondary check can be to evaluate whether Kowloon Development generated enough free cash flow to afford its dividend. Luckily it paid out just 20% of its free cash flow last year.
It's good to see that while Kowloon Development's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.
View our latest analysis for Kowloon Development
Click here to see how much of its profit Kowloon Development paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see Kowloon Development's earnings per share have dropped 26% a year over the past 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. Kowloon Development's dividend payments per share have declined at 7.3% 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.
The Bottom Line
Is Kowloon Development an attractive dividend stock, or better left on the shelf? It's not a great combination to see a company with earnings in decline and paying out 240% of its profits, which could imply the dividend may be at risk of being cut in the future. 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 an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
With that in mind though, if the poor dividend characteristics of Kowloon Development don't faze you, it's worth being mindful of the risks involved with this business. We've identified 4 warning signs with Kowloon Development (at least 2 which are a bit unpleasant), and understanding them should be part of your investment process.
Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.
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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.