Here's Why We're Wary Of Buying Emperor International Holdings Limited's (HKG:163) For Its Upcoming Dividend
It looks like Emperor International Holdings Limited (HKG:163) is about to go ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 10th of December will not receive this dividend, which will be paid on the 20th of December.
Emperor International Holdings's next dividend payment will be HK$0.035 per share. Last year, in total, the company distributed HK$0.11 to shareholders. Last year's total dividend payments show that Emperor International Holdings has a trailing yield of 6.0% on the current share price of HK$1.84. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Check out our latest analysis for Emperor International Holdings
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. An unusually high payout ratio of 322% of its profit suggests something is happening other than the usual distribution of profits to shareholders. 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. Fortunately, it paid out only 31% of its free cash flow in the past year.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Emperor International Holdings fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Click here to see how much of its profit Emperor International Holdings paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Emperor International Holdings's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 43% a year over the past five years.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past ten years, Emperor International Holdings has increased its dividend at approximately 2.9% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Emperor International Holdings is already paying out 322% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
The Bottom Line
Is Emperor International Holdings an attractive dividend stock, or better left on the shelf? It's never great to see earnings per share declining, especially when a company is paying out 322% 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 Emperor 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 Emperor International Holdings.
Keen to explore more data on Emperor International Holdings's financial performance? Check out our visualisation of its historical revenue and earnings growth.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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