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Could Leoch International Technology Limited (HKG:842) 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. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.
In this case, Leoch International Technology likely looks attractive to dividend investors, given its 3.5% dividend yield and eight-year payment history. We'd agree the yield does look enticing. Some simple research can reduce the risk of buying Leoch International Technology for its dividend - read on to learn more.
Explore this interactive chart for our latest analysis on Leoch International Technology!
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 form a view on if a company's dividend is sustainable, relative to its net profit after tax. Leoch International Technology paid out 22% of its profit as dividends, over the trailing twelve month period. Given the low payout ratio, it is hard to envision the dividend coming under threat, barring a catastrophe.
Is Leoch International Technology's Balance Sheet Risky?
As Leoch International Technology has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA measures total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). Leoch International Technology is carrying net debt of 3.90 times its EBITDA, which is getting towards the upper limit of our comfort range on a dividend stock that the investor hopes will endure a wide range of economic circumstances.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company's net interest expense. With EBIT of 1.34 times its interest expense, Leoch International Technology's interest cover is starting to look a bit thin.
Consider getting our latest analysis on Leoch International Technology's financial position here.
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. Looking at the last decade of data, we can see that Leoch International Technology paid its first dividend at least eight years ago. It's good to see that Leoch International Technology 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 eight-year period, the first annual payment was CN¥0.054 in 2011, compared to CN¥0.017 last year. Dividend payments have fallen sharply, down 68% over that time.