Zooming in on HKG:277's 1.2% Dividend Yield

Simply Wall St

Wed, Feb 12, 2020, 6:40 PM 4 min read

Dividend paying stocks like Tern Properties Company Limited (HKG:277) 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 1.2% yield is nothing to get excited about, but investors probably think the long payment history suggests Tern Properties has some staying power. The company also bought back stock during the year, equivalent to approximately 13% of the company's market capitalisation at the time. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

Click the interactive chart for our full dividend analysis

SEHK:277 Historical Dividend Yield, February 13th 2020

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. While Tern Properties pays a dividend, it reported a loss over the last year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Tern Properties paid out a conservative 40% of its free cash flow as dividends last year.

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

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. Tern Properties has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut on at least one occasion historically. During the past ten-year period, the first annual payment was HK$0.02 in 2010, compared to HK$0.054 last year. This works out to be a compound annual growth rate (CAGR) of approximately 10% a year over that time. Tern Properties's dividend payments have fluctuated, so it hasn't grown 10% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

Tern Properties has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, but it might be worth considering if the business has turned a corner.

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. Tern Properties's earnings per share have shrunk at 58% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Tern Properties's earnings per share, which support the dividend, have been anything but stable.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We're a bit uncomfortable with the company paying a dividend while being loss-making, although at least the dividend was covered by free cash flow. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. With this information in mind, we think Tern Properties may not be an ideal dividend stock.

Now, if you want to look closer, it would be worth checking out our free research on Tern Properties management tenure, salary, and performance.

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

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.

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. Thank you for reading.

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