It Might Not Be A Great Idea To Buy Telecom Digital Holdings Limited (HKG:6033) For Its Next Dividend

Telecom Digital Holdings Limited (HKG:6033) is about to trade ex-dividend in the next three days. 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. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Therefore, if you purchase Telecom Digital Holdings' shares on or after the 12th of December, you won't be eligible to receive the dividend, when it is paid on the 13th of January.

The company's next dividend payment will be HK$0.03 per share. Last year, in total, the company distributed HK$0.06 to shareholders. Based on the last year's worth of payments, Telecom Digital Holdings stock has a trailing yield of around 7.7% on the current share price of HK$0.78. If you buy this business for its dividend, you should have an idea of whether Telecom Digital Holdings's dividend is reliable and sustainable. So we need to investigate whether Telecom Digital Holdings can afford its dividend, and if the dividend could grow.

See our latest analysis for Telecom Digital Holdings

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Telecom Digital Holdings paid out 134% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Luckily it paid out just 24% of its free cash flow last year.

It's good to see that while Telecom Digital Holdings's dividends were not covered by profits, at least they are affordable from a cash perspective. 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.

Click here to see how much of its profit Telecom Digital Holdings paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Telecom Digital Holdings's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 31% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Telecom Digital Holdings has lifted its dividend by approximately 4.1% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Telecom Digital Holdings is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

The Bottom Line

Should investors buy Telecom Digital Holdings for the upcoming dividend? It's never great to see earnings per share declining, especially when a company is paying out 134% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Telecom Digital Holdings's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. Bottom line: Telecom Digital Holdings has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that being said, if you're still considering Telecom Digital Holdings as an investment, you'll find it beneficial to know what risks this stock is facing. For example, Telecom Digital Holdings has 6 warning signs (and 2 which are potentially serious) we think you should know about.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.