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Could Fire Rock Holdings Limited (HKG:1909) 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.
With only a two-year payment history, and a 1.4% yield, investors probably think Fire Rock Holdings is not much of a dividend stock. A low dividend might not be a bad thing, if the company is reinvesting heavily and growing its sales and profits. Some simple research can reduce the risk of buying Fire Rock Holdings for its dividend - read on to learn more.
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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. 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. Looking at the data, we can see that 18% of Fire Rock Holdings's profits were paid out as dividends in the last 12 months. Given the low payout ratio, it is hard to envision the dividend coming under threat, barring a catastrophe.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Fire Rock Holdings's cash payout ratio last year was 1.0%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
With a strong net cash balance, Fire Rock Holdings investors may not have much to worry about in the near term from a dividend perspective.
Consider getting our latest analysis on Fire Rock Holdings's financial position here.
Dividend Volatility
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. 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 two-year period, the first annual payment was CN¥0.12 in 2018, compared to CN¥0.066 last year. This works out to a decline of approximately 47% over that time.