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Dividend paying stocks like Tsui Wah Holdings Limited (HKG:1314) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested 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.
In this case, Tsui Wah Holdings likely looks attractive to dividend investors, given its 6.0% dividend yield and six-year payment history. We'd agree the yield does look enticing. The company also bought back stock during the year, equivalent to approximately 2.9% of the company's market capitalisation at the time. Some simple research can reduce the risk of buying Tsui Wah Holdings for its dividend - read on to learn more.
SEHK:1314 Historical Dividend Yield, May 29th 2019
Payout ratios
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, 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 76% of Tsui Wah Holdings's profits were paid out as dividends in the last 12 months. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Tsui Wah Holdings paid out 169% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. Paying out such a high percentage of cash flow suggests that the dividend was funded from either cash at bank or by borrowing, neither of which is desirable over the long term. While Tsui Wah Holdings's dividends were covered by the company's reported profits, free cash flow is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Tsui Wah Holdings to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
While the above analysis focuses on dividends relative to a company's earnings, we do note Tsui Wah Holdings's strong net cash position, which will let it pay larger dividends for a time, should it choose.
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 Tsui Wah Holdings has been paying a dividend for the past six years. It's good to see that Tsui Wah Holdings 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$0.05 in 2013, compared to HK$0.04 last year. The dividend has shrunk at around 3.7% a year during that period. Tsui Wah Holdings's dividend has been cut sharply at least once, so it hasn't fallen by 3.7% every year, but this is a decent approximation of the long term change.
A shrinking dividend over a six-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.
Dividend Growth Potential
With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. In the last five years, Tsui Wah Holdings's earnings per share have shrunk at approximately 22% per annum. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company's dividend.
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. First, we think Tsui Wah Holdings has an acceptable payout ratio, although its dividend was not well covered by cashflow. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. Using these criteria, Tsui Wah Holdings looks quite suboptimal from a dividend investment perspective.
See if management have their own wealth at stake, by checking insider shareholdings in Tsui Wah Holdings stock.
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.
