Should You Buy UMP Healthcare Holdings Limited (HKG:722) For Its Dividend?

Simply Wall St

Fri, Sep 27, 2019, 7:48 PM

Today we'll take a closer look at UMP Healthcare Holdings Limited (HKG:722) 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.

Some readers mightn't know much about UMP Healthcare Holdings's 2.1% dividend, as it has only been paying distributions for the last three years. A low dividend might not be a bad thing, if the company is reinvesting heavily and growing its sales and profits. Some simple analysis can reduce the risk of holding UMP Healthcare Holdings for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on UMP Healthcare Holdings!

SEHK:722 Historical Dividend Yield, September 28th 2019

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. 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. UMP Healthcare Holdings paid out 665% of its profit as dividends, over the trailing twelve month period. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Last year, UMP Healthcare Holdings paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

With a strong net cash balance, UMP Healthcare Holdings investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on UMP Healthcare Holdings's financial position here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. It has only been paying dividends for a few short years, and the dividend has already been cut at least once. This is one income stream we're not ready to live on. During the past three-year period, the first annual payment was HK$0.02 in 2016, compared to HK$0.03 last year. Dividends per share have grown at approximately 14% per year over this time. The dividends haven't grown at precisely 14% every year, but this is a useful way to average out the historical rate of growth.

It's not great to see that the payment has been cut in the past. We're generally more wary of companies that have cut their dividend before, as they tend to perform worse in an economic downturn.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? UMP Healthcare Holdings's earnings per share have shrunk at 61% a year over the past three years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and UMP Healthcare Holdings's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that UMP Healthcare Holdings's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. UMP Healthcare Holdings paid out almost all of its cash flow and profit as dividends, leaving little to reinvest in the business. Earnings per share are down, and UMP Healthcare Holdings's dividend has been cut at least once in the past, which is disappointing. Using these criteria, UMP Healthcare Holdings looks quite suboptimal from a dividend investment perspective.

You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in UMP Healthcare Holdings stock.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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.

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. Thank you for reading.

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