Why It Might Not Make Sense To Buy Onewo Inc. (HKG:2602) For Its Upcoming Dividend
Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Onewo Inc. (HKG:2602) is about to go ex-dividend in just 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Accordingly, Onewo investors that purchase the stock on or after the 3rd of September will not receive the dividend, which will be paid on the 25th of September.
The company's next dividend payment will be CN¥0.711 per share, and in the last 12 months, the company paid a total of CN¥1.50 per share. Looking at the last 12 months of distributions, Onewo has a trailing yield of approximately 9.0% on its current stock price of HK$19.43. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.
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 212% of its profit suggests something is happening other than the usual distribution of profits to shareholders. A useful secondary check can be to evaluate whether Onewo generated enough free cash flow to afford its dividend. Onewo paid out more free cash flow than it generated - 138%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.
Onewo 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.
Cash is slightly more important than profit from a dividend perspective, but given Onewo's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
Check out our latest analysis for Onewo
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're discomforted by Onewo's 17% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last three years, Onewo has lifted its dividend by approximately 84% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Onewo is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
Final Takeaway
Is Onewo an attractive dividend stock, or better left on the shelf? Not only are earnings per share declining, but Onewo is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
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 Onewo. To help with this, we've discovered 2 warning signs for Onewo (1 is a bit concerning!) that you ought to be aware of before buying the shares.
If you're in the market for strong dividend payers, we recommend checking our selection of top 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.