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Today we'll take a closer look at HiTechPros SA (EPA:ALHIT) 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. 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.
With a nine-year payment history and a 7.9% yield, many investors probably find HiTechPros intriguing. It sure looks interesting on these metrics - but there's always more to the story . Some simple analysis can reduce the risk of holding HiTechPros for its dividend, and we'll focus on the most important aspects below.
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Payout ratios
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, HiTechPros paid out 96% of its profit as dividends. Its payout ratio is quite high, and the dividend is not well covered by earnings. If earnings are growing or the company has a large cash balance, this might be sustainable - still, we think it is a concern.
Remember, you can always get a snapshot of HiTechPros'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. The first recorded dividend for HiTechPros, in the last decade, was nine years ago. Although it has been paying a dividend for several years now, the dividend has been cut at least once by more than 20%, and we're cautious about the consistency of its dividend across a full economic cycle. During the past nine-year period, the first annual payment was €1.00 in 2010, compared to €1.25 last year. This works out to be a compound annual growth rate (CAGR) of approximately 2.5% a year over that time. The dividends haven't grown at precisely 2.5% every year, but this is a useful way to average out the historical rate of growth.
Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.