Readers hoping to buy Perfect Shape Medical Limited (HKG:1830) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You can purchase shares before the 14th of December in order to receive the dividend, which the company will pay on the 12th of January.
Perfect Shape Medical’s next dividend payment will be HK$0.13 per share. Last year, in total, the company distributed HK$0.34 to shareholders. Based on the last year’s worth of payments, Perfect Shape Medical stock has a trailing yield of around 9.4% on the current share price of HK$3.29. 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.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Perfect Shape Medical distributed an unsustainably high 128% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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. Fortunately, it paid out only 32% of its free cash flow in the past year.
It’s disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Perfect Shape Medical fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we’d be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it’s easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. For this reason, we’re glad to see Perfect Shape Medical’s earnings per share have risen 13% per annum over the last five years.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Perfect Shape Medical has delivered 37% dividend growth per year on average over the past eight years. It’s great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
Should investors buy Perfect Shape Medical for the upcoming dividend? It’s good to see earnings per share growing and low cashflow payout ratio, although we’re uncomfortable with Perfect Shape Medical’s paying out such a high percentage of its profit. In summary, while it has some positive characteristics, we’re not inclined to race out and buy Perfect Shape Medical today.
So while Perfect Shape Medical looks good from a dividend perspective, it’s always worthwhile being up to date with the risks involved in this stock. For example, we’ve found 3 warning signs for Perfect Shape Medical that we recommend you consider before investing in the business.
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.
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