Why It Might Not Make Sense To Buy Anhui Expressway Company Limited (HKG:995) For Its Upcoming Dividend

Readers hoping to buy Anhui Expressway Company Limited (HKG:995) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Investors can purchase shares before the 28th of May in order to be eligible for this dividend, which will be paid on the 22nd of July.

Anhui Expressway's next dividend payment will be HK$0.23 per share, on the back of last year when the company paid a total of HK$0.23 to shareholders. Calculating the last year's worth of payments shows that Anhui Expressway has a trailing yield of 6.6% on the current share price of HK$3.81. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Anhui Expressway

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. That's why it's good to see Anhui Expressway paying out a modest 49% of its earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Anhui Expressway paid out more free cash flow than it generated - 143%, 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.

Anhui Expressway paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Anhui Expressway's ability to maintain its dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. 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 not enthused to see that Anhui Expressway's earnings per share have remained effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Anhui Expressway has delivered an average of 1.4% per year annual increase in its dividend, based on the past ten years of dividend payments.

To Sum It Up

Should investors buy Anhui Expressway for the upcoming dividend? It's disappointing to see earnings per share have fallen slightly, even though Anhui Expressway is paying out less than half its income as dividends. It's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Ever wonder what the future holds for Anhui Expressway? See what the three analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

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This article by Simply Wall St is general in nature. 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. Thank you for reading.