Should income investors watch Guoco Group Limited (HKG:53) ahead of its ex-dividend?
Guoco Group Limited (HKG:53) the stock is set to trade ex-dividend in four days. Typically, the ex-dividend date is one business day before the record date which is the date a company determines which shareholders are eligible to receive a dividend. The ex-dividend date is an important date to know because any purchase of shares made on or after this date may mean late settlement which does not appear on the record date. As a result, Guoco Group investors who buy the stock on or after March 8 will not receive the dividend, which will be paid on March 23.
The company’s next dividend is HK$0.50 per share, following the past 12 months, when the company distributed a total of HK$2.00 per share to shareholders. Based on last year’s payouts, Guoco Group has a 2.4% return on the current share price of HK$84.6. Dividends are a major contributor to investment returns for long-term holders, but only if the dividend continues to be paid. We therefore need to consider whether the Guoco Group can afford its dividend and whether the dividend could increase.
Check out our latest analysis for Guoco Group
Dividends are usually paid out of company profits, so if a company pays out more than it has earned, its dividend is usually at risk of being reduced. Fortunately, the Guoco Group’s payout ratio is modest, at just 31% of profits. A useful secondary check may be to assess whether the Guoco Group has generated enough free cash flow to pay its dividend. The good thing is that dividends have been well covered by free cash flow, with the company paying out 20% of its free cash flow last year.
It is positive to see that the Guoco Group dividend is covered by both earnings and cash flow, as this is usually a sign that the dividend is sustainable, and a lower payout ratio usually suggests a higher margin security before the dividend is reduced.
Click here to see how much of its profit Guoco Group has paid out over the past 12 months.
Have earnings and dividends increased?
When earnings decline, dividend companies become much more difficult to analyze and to own safely. If earnings fall and the company is forced to cut its dividend, investors could see the value of their investment go up in smoke. With that in mind, we are bothered by the 7.5% annual decline in Guoco Group profits over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid out shrinks.
Many investors will gauge a company’s dividend yield by evaluating how much dividend payouts have changed over time. Dividend payouts per Guoco Group share have declined by an average of 4.6% per year over the past 10 years, which is uninspiring. It’s never nice to see earnings and dividends dip, but at least management cut the dividend rather than potentially risking the health of the business in an attempt to maintain it.
Is Guoco Group an attractive dividend stock, or is it better left on the shelf? Earnings per share are down significantly, even though at least the company is paying out a low, conservative percentage of its earnings and cash flow. It’s certainly not great to see earnings drop, but at least there may be a buffer before the dividend has to be cut. It might be worth investigating whether the company is reinvesting in growth projects that could boost earnings and dividends in the future, but so far we’re not so optimistic about its dividend outlook.
In light of this, although Guoco Group has an attractive dividend, it is worth knowing the risks associated with this stock. In terms of investment risks, we have identified 1 warning sign with Guoco Group and understanding them should be part of your investment process.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.