It looks like China Merchants Port Holdings Company Limited (HKG: 144) is set to be ex-dividend within the next 4 days. Typically, the ex-dividend date is one business day prior to the record date which is the date a company determines which shareholders are eligible to receive a dividend. The ex-dividend date is an important date to know, as any purchase of shares made after this date may mean a late settlement which does not appear on the registration date. In other words, investors can buy shares of China Merchants Port Holdings before June 8 in order to be eligible for the dividend, which will be paid on July 16.

The company’s next dividend payment will be HK $ 0.51 per share, compared to last year when the company paid a total of HK $ 0.69 to shareholders. Based on last year’s payouts, China Merchants Port Holdings has a rolling 5.5% return on the current share price of HK $ 12.66. Dividends are a major contributor to returns on investment for long-term holders, but only if the dividend continues to be paid. That is why we should always check whether dividend payments seem sustainable and whether the business is growing.

See our latest analysis for China Merchants Port Holdings

Dividends are usually paid out of business income, so if a business pays more than it earned, its dividend is usually at risk of being reduced. Fortunately, China Merchants Port Holdings’ payout ratio is modest, at just 47% of earnings. Yet cash flow is usually more important than earnings in assessing dividend sustainability, so we always need to check whether the company has generated enough cash to pay its dividend. It paid 18% of its free cash flow as dividends last year, which is cautiously low.

It is encouraging to see that the dividend is covered by both earnings and cash flow. This usually suggests that the dividend is sustainable, as long as profits don’t drop sharply.

Click here to view the company’s payout ratio, as well as analysts’ estimates of its future dividends.

Have profits and dividends increased?

Stocks with stable earnings can still be attractive dividend payers, but it’s important to be more careful in your approach and demand a greater margin of safety when it comes to dividend sustainability. If profits fall and the company is forced to cut its dividend, investors could see the value of their investment go up in smoke. This explains why we are not too excited about the stable earnings of China Merchants Port Holdings over the past five years. Better than seeing them fall off a cliff, of course, but the best dividend-paying stocks increase their earnings significantly over the long term.

China Merchants Port Holdings has also issued more than 5% of its market cap in new stocks over the past year, which we believe may hurt its long-term dividend outlook. Trying to raise the dividend while issuing large amounts of new stock reminds us of the ancient Greek tale of Sisyphus – perpetually pushing a rock upward.

Another key way to measure a company’s dividend outlook is to measure its historical rate of dividend growth. China Merchants Port Holdings has seen its dividend fall by 3.9% per year on average over the past 10 years, which is not great to see.

The bottom line

Should investors buy China Merchants Port Holdings for the next dividend? While it’s not great to see that earnings per share are indeed stable over the 10-year period we’ve checked, at least the payout ratios are low and conservative. To sum up, China Merchants Port Holdings looks good in this analysis, although it doesn’t look like a great opportunity.

On that note, you’ll want to research the risks China Merchants Port Holdings faces. For example – China Merchants Port Holdings has 4 warning signs we think you should be aware.

If you are in the dividend-paying stock market, we recommend that you check out our list of the highest dividend-paying stocks with a yield above 2% and a future dividend.

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