New World Development Company Limited (HKG:17) is about to trade ex-dividend in the next four days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible 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. This means that investors who purchase New World Development's shares on or after the 20th of March will not receive the dividend, which will be paid on the 18th of April.
The company's next dividend payment will be HK$0.20 per share. Last year, in total, the company distributed HK$0.40 to shareholders. Calculating the last year's worth of payments shows that New World Development has a trailing yield of 4.3% on the current share price of HK$9.36. 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.
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. New World Development distributed an unsustainably high 177% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether New World Development generated enough free cash flow to afford its dividend. New World Development paid out more free cash flow than it generated - 131%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
Cash is slightly more important than profit from a dividend perspective, but given New World Development's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. New World Development's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 50% 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. New World Development's dividend payments per share have declined at 13% per year on average over the past 10 years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.
Final Takeaway
Is New World Development an attractive dividend stock, or better left on the shelf? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (177%) and cash flow as dividends. This is a clearly suboptimal combination that usually suggests the dividend is at risk of being cut. If not now, then perhaps in the future. Bottom line: New World Development has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
So if you're still interested in New World Development despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Be aware that New World Development is showing 4 warning signs in our investment analysis, and 1 of those is significant...
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.