Readers hoping to buy Old Chang Kee Ltd. (Catalist:5ML) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the 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 Old Chang Kee's shares on or after the 1st of December will not receive the dividend, which will be paid on the 19th of December.
The company's upcoming dividend is S$0.01 a share, following on from the last 12 months, when the company distributed a total of S$0.02 per share to shareholders. Based on the last year's worth of payments, Old Chang Kee stock has a trailing yield of around 3.0% on the current share price of SGD0.67. If you buy this business for its dividend, you should have an idea of whether Old Chang Kee's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately Old Chang Kee's payout ratio is modest, at just 49% of profit. A useful secondary check can be to evaluate whether Old Chang Kee generated enough free cash flow to afford its dividend. It paid out 13% of its free cash flow as dividends last year, which is conservatively low.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's encouraging to see Old Chang Kee has grown its earnings rapidly, up 23% a year for the past five years. Earnings per share have been growing very quickly, and the company is paying out a relatively low percentage of its profit and cash flow. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Old Chang Kee has delivered an average of 2.9% per year annual increase in its dividend, based on the past 10 years of dividend payments. Earnings per share have been growing much quicker than dividends, potentially because Old Chang Kee is keeping back more of its profits to grow the business.
The Bottom Line
Should investors buy Old Chang Kee for the upcoming dividend? It's great that Old Chang Kee is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It's disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. There's a lot to like about Old Chang Kee, and we would prioritise taking a closer look at it.
While it's tempting to invest in Old Chang Kee for the dividends alone, you should always be mindful of the risks involved. Every company has risks, and we've spotted 4 warning signs for Old Chang Kee (of which 1 doesn't sit too well with us!) you should know about.
If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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