Don’t buy Top Spring International Holdings Limited (HKG:3688) for its upcoming dividend without doing these checks

Readers hoping to buy Top Spring International Holdings Limited (HKG:3688) as its dividend will have to make its way shortly, as the stock is set to trade ex-dividend. 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. That means you’ll need to buy shares of Top Spring International Holdings by June 10 to receive the dividend, which will be paid on June 29.

The company’s next dividend is HK$0.01 per share, following the past 12 months, when the company distributed a total of HK$0.06 per share to shareholders. Based on last year’s payouts, Top Spring International Holdings has a 4.5% yield on the current share price of HK$0.88. Dividends are an important source of income for many shareholders, but the health of the company is essential to sustaining those dividends. So we need to consider whether Top Spring International Holdings can afford its dividend and whether the dividend could increase.

See our latest analysis for Top Spring International Holdings

If a company pays out more dividends than it has earned, the dividend may become unsustainable – a less than ideal situation. Top Spring International Holdings distributed 183% of its profits as dividends to shareholders last year. Without extenuating circumstances, we consider that the dividend risks being reduced. Still, cash flow is even more important than earnings in evaluating a dividend, so we need to see if the company has generated enough cash to pay its distribution. Over the past year, it has paid out 50% of its free cash flow as dividends, within the usual range for most companies.

It’s good to see that even though Top Spring International Holdings’ dividends weren’t covered by earnings, they are at least affordable from a cash flow perspective. Still, if the company repeatedly pays out a dividend that exceeds its earnings, we’d be worried. Very few companies are able to sustainably pay dividends above their reported earnings.

Click here to see how much profit Top Spring International Holdings has paid out over the past 12 months.

SEHK:3688 Historic dividend June 6, 2022

Have earnings and dividends increased?

When earnings decline, dividend companies become much more difficult to analyze and to own safely. If business goes into a recession and the dividend is cut, the company could see its value drop precipitously. Top Spring International Holdings’ revenues collapsed faster than Wile E Coyote’s schemes to trap the Road Runner; a huge decline of 49% per year over the past five years.

Many investors will gauge a company’s dividend yield by evaluating how much dividend payouts have changed over time. Top Spring International Holdings has seen its dividend drop by an average of 18% per year over the past 10 years, which isn’t great to see. While it’s not great that earnings and dividends per share have fallen in recent years, we’re encouraged that management has cut the dividend rather than risk overcommitting the company in a risky attempt to maintain shareholder returns.

To sum up

Is Top Spring International Holdings an attractive dividend stock, or is it better left on the shelf? Earnings per share have been declining lately. Worse still, Top Spring International Holdings pays out the majority of its earnings and more than half of its free cash flow. Positive cash flow is good news, but it’s not a good combination. With the way things are developing from a dividend perspective, we would be inclined to avoid Top Spring International Holdings.

So if you’re still interested in Top Spring International Holdings despite its low dividend qualities, you should be well-informed about some of the risks this stock faces. For example, we have identified 4 warning signs for Top Spring International Holdings (2 should not be ignored) which you should be aware of.

If you are looking for strong dividend payers, we recommend by consulting our selection of the best dividend-paying stocks.

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.

About Tina G.

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