It Might Not Be A Great Idea To Buy Shougang Century Holdings Limited (HKG:103) For Its Next Dividend
Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Shougang Century Holdings Limited (HKG:103) is about to trade ex-dividend in the next three 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Thus, you can purchase Shougang Century Holdings' shares before the 16th of July in order to receive the dividend, which the company will pay on the 31st of July.
The company's upcoming dividend is HK$0.078 a share, following on from the last 12 months, when the company distributed a total of HK$0.078 per share to shareholders. Based on the last year's worth of payments, Shougang Century Holdings has a trailing yield of 4.3% on the current stock price of HK$1.83. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Shougang Century Holdings 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. Shougang Century Holdings paid out 72% of its earnings to investors last year, a normal payout level for most businesses. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the last year, it paid out dividends equivalent to 288% of what it generated in free cash flow, a disturbingly high percentage. Our definition of free cash flow excludes cash generated from asset sales, so since Shougang Century Holdings is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.
While Shougang Century 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. Were this to happen repeatedly, this would be a risk to Shougang Century Holdings's ability to maintain its dividend.
See our latest analysis for Shougang Century Holdings
Click here to see how much of its profit Shougang Century Holdings paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see Shougang Century Holdings's earnings per share have dropped 23% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
Shougang Century Holdings also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. It's hard to grow dividends per share when a company keeps creating new shares.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Shougang Century Holdings has delivered an average of 7.7% per year annual increase in its dividend, based on the past six years of dividend payments. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.
Final Takeaway
From a dividend perspective, should investors buy or avoid Shougang Century Holdings? Shougang Century Holdings had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not that we think Shougang Century Holdings is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
With that in mind though, if the poor dividend characteristics of Shougang Century Holdings don't faze you, it's worth being mindful of the risks involved with this business. To that end, you should learn about the 2 warning signs we've spotted with Shougang Century Holdings (including 1 which doesn't sit too well with us).
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.
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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.