Hong Kong Shanghai Alliance Holdings Limited (HKG:1001) stock is about to trade ex-dividend in 4 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a 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. Accordingly, Hong Kong Shanghai Alliance Holdings investors that purchase the stock on or after the 16th of December will not receive the dividend, which will be paid on the 9th of January.

The company's next dividend payment will be HK$0.018 per share, on the back of last year when the company paid a total of HK$0.028 to shareholders. Based on the last year's worth of payments, Hong Kong Shanghai Alliance Holdings stock has a trailing yield of around 8.9% on the current share price of HK$0.315. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Hong Kong Shanghai Alliance Holdings has been able to grow its dividends, or if the dividend might be cut.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Hong Kong Shanghai Alliance Holdings paid out just 22% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. 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 11% of its free cash flow last year.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see how much of its profit Hong Kong Shanghai Alliance Holdings paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's encouraging to see Hong Kong Shanghai Alliance Holdings has grown its earnings rapidly, up 42% a year for the past five years. Hong Kong Shanghai Alliance Holdings earnings per share have been sprinting ahead like the Road Runner at a track and field day; scarcely stopping even for a cheeky "beep-beep". We also like that it is reinvesting most of its profits in its business.'

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Hong Kong Shanghai Alliance Holdings's dividend payments per share have declined at 10% per year on average over the past 10 years, which is uninspiring. Hong Kong Shanghai Alliance Holdings is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.

Final Takeaway

Has Hong Kong Shanghai Alliance Holdings got what it takes to maintain its dividend payments? Hong Kong Shanghai Alliance Holdings has grown its earnings per share while simultaneously reinvesting in the business. Unfortunately it's cut the dividend at least once in the past 10 years, but the conservative payout ratio makes the current dividend look sustainable. There's a lot to like about Hong Kong Shanghai Alliance Holdings, and we would prioritise taking a closer look at it.

On that note, you'll want to research what risks Hong Kong Shanghai Alliance Holdings is facing. Our analysis shows 4 warning signs for Hong Kong Shanghai Alliance Holdings that we strongly recommend you have a look at before investing in the company.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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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.