Why You Should Leave Sands China Ltd. (HKG:1928)'s Upcoming Dividend On The Shelf

It looks like Sands China Ltd. (HKG:1928) is about to go ex-dividend in the next 4 days. If you purchase the stock on or after the 3rd of February, you won't be eligible to receive this dividend, when it is paid on the 21st of February.

The upcoming dividend for Sands China is HK$0.99 per share, increased from last year's total dividends per share of HK$0.25. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Sands China has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Sands China

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year, Sands China paid out 104% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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. Over the last year, it paid out more than three-quarters (88%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's good to see that while Sands China'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. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's not ideal to see Sands China's earnings per share have been shrinking at 2.4% a year over the previous five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past eight years, Sands China has increased its dividend at approximately 6.9% 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. Sands China is already paying out 104% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

The Bottom Line

Has Sands China got what it takes to maintain its dividend payments? Earnings per share have been shrinking in recent times. What's more, Sands China is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. Bottom line: Sands China has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Ever wonder what the future holds for Sands China? See what the 24 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

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