Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Nanyang Holdings Limited (HKG:212) is about to trade ex-dividend in the next 3 days. You will need to purchase shares before the 28th of May to receive the dividend, which will be paid on the 12th of June.
Nanyang Holdings's next dividend payment will be HK$1.40 per share, and in the last 12 months, the company paid a total of HK$1.40 per share. Last year's total dividend payments show that Nanyang Holdings has a trailing yield of 3.3% on the current share price of HK$42.5. 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 check whether the dividend payments are covered, and if earnings are 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. That's why it's good to see Nanyang Holdings paying out a modest 40% of its earnings. 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. It paid out 110% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.
Nanyang 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.
While Nanyang Holdings's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Nanyang 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?
Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Nanyang Holdings's earnings per share have fallen at approximately 28% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past ten years, Nanyang Holdings has increased its dividend at approximately 13% a year on average.
The Bottom Line
Is Nanyang Holdings an attractive dividend stock, or better left on the shelf? It's disappointing to see earnings per share declining, and this would ordinarily be enough to discourage us from most dividend stocks, even though Nanyang Holdings is paying out less than half its income as dividends. However, it's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. Bottom line: Nanyang Holdings has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
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 Nanyang Holdings. To help with this, we've discovered 3 warning signs for Nanyang Holdings that you should be aware of before investing in their shares.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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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. 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. Thank you for reading.