Tan Chong International Limited (HKG:693) Is Yielding 4.8%

Tan Chong International Limited (HKG:693) Is Yielding 4.8% - But Is It A Buy?

Simply Wall St

Tue, May 28, 2019, 9:05 PM

Dividend paying stocks like Tan Chong International Limited (HKG:693) 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. 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.

A high yield and a long history of paying dividends is an appealing combination for Tan Chong International. We'd guess that plenty of investors have purchased it for the income. Some simple analysis can reduce the risk of holding Tan Chong International for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Tan Chong International!

SEHK:693 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. So we need to be form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 40% of Tan Chong International's profits were paid out as dividends in the last 12 months. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. Plus, there is room to increase the payout ratio over time.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Tan Chong International paid out 118% of its free cash flow last year, which we think is concerning if cash flows do not improve. Tan Chong International paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough free cash flow to cover the dividend. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to Tan Chong International's ability to maintain its dividend.

With a strong net cash balance, Tan Chong International investors may not have much to worry about in the near term from a dividend perspective.

Remember, you can always get a snapshot of Tan Chong International's latest financial position, by checking our visualisation of its financial health.

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. For the purpose of this article, we only scrutinise the last decade of Tan Chong International's dividend payments. The dividend has been stable over the past 10 years, which is great. We think this could suggest some resilience to the business and its dividends. During the past ten-year period, the first annual payment was HK$0.02 in 2009, compared to HK$0.12 last year. This works out to be a compound annual growth rate (CAGR) of approximately 20% a year over that time.

It's rare to find a company that has grown its dividends rapidly over ten years and not had any notable cuts, but Tan Chong International has done it, which we really like.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. In the last five years, Tan Chong International'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. Tan Chong International has a low payout ratio, which we like, although it paid out virtually all of its generated cash. It's not great to see earnings per share shrinking. The dividends have been relatively consistent, but we wonder for how much longer this will be true. In sum, we find it hard to get excited about Tan Chong International from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.

You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in Tan Chong International stock.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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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