Herald Holdings Limited (HKG: 114) will pay a dividend of HK $ 0.03 on October 13. Based on this payment, the dividend yield on the shares of the company will be 9.2%, which is an attractive increase in returns for shareholders.
Check out our latest analysis for Herald Holdings
Herald Holdings pays more than it earns
While it’s great to have a strong dividend yield, we also need to determine if the payout is sustainable. Prior to this announcement, the company paid 176% of what it earned, but the dividend was fairly comfortably covered by free cash flow at a cash payout ratio of only. Healthy cash flows are always a positive sign, especially when they easily cover the dividend.
If the company fails to turn the tide, EPS could drop 12.1% over the next year. Assuming the dividend continues on recent trends, we think the payout ratio could reach 185%, which could put the dividend under pressure if earnings don’t start improving.
Although the company has a long history of dividends, it has been cut at least once in the past 10 years. As of 2011, the first annual payment was HK $ 0.09, compared to the last annual payment of HK $ 0.06. When you do the math, this is a decrease of about 4.0% per year. In general, we don’t like to see a dividend that decreases over time as this can degrade shareholder returns and indicate that the company may be in trouble.
The dividend has limited growth potential
With a relatively volatile dividend, it is even more important to assess whether earnings per share are increasing, which could indicate a growing dividend in the future. Herald Holdings’ earnings per share have declined 12% per year over the past five years. Such rapid declines certainly have the potential to restrict dividend payments if the trend continues in the future.
The dividend could prove to be unreliable
Overall, it’s nice to see a consistent dividend payout, but we believe in the longer term the current payout level could be unsustainable. The company generates a lot of cash, which could hold the dividend for a while, but the track record is not great. We don’t think Herald Holdings is a great stock to add to your portfolio if income is your goal.
Market movements testify to the high value of a coherent dividend policy compared to a more unpredictable one. However, there are other things for investors to consider when analyzing the performance of stocks. For example, we have identified 4 warning signs for Herald Holdings (1 is a bit worrying!) Which you should know before investing. If you are a dividend investor, you can also view our curated list of high performing dividend stocks.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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