Know This Before Buying Hang Sang (Siu Po) International Holding Company Limited (HKG:3626) For Its Dividend
Could Hang Sang (Siu Po) International Holding Company Limited (HKG:3626) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
Some readers mightn't know much about Hang Sang (Siu Po) International Holding's 7.4% dividend, as it has only been paying distributions for a year or so. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.
Click the interactive chart for our full dividend analysis
Payout ratios
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 553% of Hang Sang (Siu Po) International Holding's profits were paid out as dividends in the last 12 months. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Hang Sang (Siu Po) International Holding paid out 99% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. Cash is slightly more important than profit from a dividend perspective, but given Hang Sang (Siu Po) International Holding's payouts were not well covered by either earnings or cash flow, we would definitely be concerned about the sustainability of this dividend.
While the above analysis focuses on dividends relative to a company's earnings, we do note Hang Sang (Siu Po) International Holding's strong net cash position, which will let it pay larger dividends for a time, should it choose.
Remember, you can always get a snapshot of Hang Sang (Siu Po) International Holding's latest financial position, by checking our visualisation of its financial health.
Dividend Volatility
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. This company has been paying a dividend for less than 2 years, which we think is too soon to consider it a reliable dividend stock. Its most recent annual dividend was HK$0.05 per share.
It's good to see at least some dividend growth. Yet with a relatively short dividend paying history, we wouldn't want to depend on this dividend too heavily.
Dividend Growth Potential
Examining whether the dividend is affordable and stable is important. However, it's also important to assess if earnings per share (EPS) are growing. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient's purchasing power. Hang Sang (Siu Po) International Holding's EPS have fallen by approximately 26% per year during the past three years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Hang Sang (Siu Po) International Holding's earnings per share, which support the dividend, have been anything but stable.
Conclusion
Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. It's a concern to see that the company paid out such a high percentage of its earnings and cashflow as dividends. Earnings per share are down, and to our mind Hang Sang (Siu Po) International Holding has not been paying a dividend long enough to demonstrate its resilience across economic cycles. Using these criteria, Hang Sang (Siu Po) International Holding looks quite suboptimal from a dividend investment perspective.
Are management backing themselves to deliver performance? Check their shareholdings in Hang Sang (Siu Po) International Holding in our latest insider ownership analysis.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
