Today we’ll take a closer look at Hong Kong Finance Group Limited (HKG:1273) from a dividend investor’s perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Unfortunately, it’s common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
With a six-year payment history and a 5.7% yield, many investors probably find Hong Kong Finance Group intriguing. It sure looks interesting on these metrics – but there’s always more to the story . Some simple analysis can offer a lot of insights when buying a company for its dividend, and we’ll go through this below.
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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. In the last year, Hong Kong Finance Group paid out 22% of its profit as dividends. We’d say its dividends are thoroughly covered by earnings.
Remember, you can always get a snapshot of Hong Kong Finance Group’s latest financial position, by checking our visualisation of its financial health.
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. Looking at the data, we can see that Hong Kong Finance Group has been paying a dividend for the past six years. It’s good to see that Hong Kong Finance Group has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we’re concerned that what has been cut once, could be cut again. During the past six-year period, the first annual payment was HK$0.028 in 2014, compared to HK$0.026 last year. The dividend has shrunk at around 1.2% a year during that period. Hong Kong Finance Group’s dividend has been cut sharply at least once, so it hasn’t fallen by 1.2% every year, but this is a decent approximation of the long term change.
When a company’s per-share dividend falls we question if this reflects poorly on either external business conditions, or the company’s capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.
Dividend Growth Potential
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Hong Kong Finance Group’s EPS are effectively flat over the past five years. Over the long term, steady earnings per share is a risk as the value of the dividends can be reduced by inflation. Growth has been hard to come by. However, the payout ratio is low, and some companies can deliver adequate dividend performance simply by increasing the payout ratio.
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We’re glad to see Hong Kong Finance Group has a low payout ratio, as this suggests earnings are being reinvested in the business. Second, earnings have been essentially flat, and its history of dividend payments is chequered – having cut its dividend at least once in the past. While we’re not hugely bearish on it, overall we think there are potentially better dividend stocks than Hong Kong Finance Group out there.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Just as an example, we’ve come accross 3 warning signs for Hong Kong Finance Group you should be aware of, and 1 of them doesn’t sit too well with us.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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n error that warrants correction, please contact the editor at [email protected]. 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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