Limited Modern Dental Group (HKG:3600) cut its dividend to HK$0.044 on June 22. However, the 6.0% dividend yield is still a good boost for shareholder returns.
While the dividend yield is important for income investors, it’s also important to take into account any large changes in share price, as this will generally outweigh any gains from distributions. Modern Dental Group’s share price is down 42% in the past 3 months, which is not ideal for investors and may explain a sharp increase in dividend yield.
Check out our latest analysis for Modern Dental Group
Modern Dental Group revenue easily covers distributions
While it’s good to have a high dividend yield, we also have to ask ourselves if the payout is sustainable. However, Modern Dental Group’s earnings easily cover the dividend. This means that most of what the business earns is used to help it grow.
Over the next year, EPS is expected to increase by 14.1%. If the dividend continues on this path, the payout ratio could be 51% by next year, which we believe can be quite sustainable going forward.
Modern Dental Group’s dividend lacks consistency
Even in its relatively short history, the company has cut the dividend at least once. If the company cuts once, that’s certainly no argument against the possibility of it cutting in the future. Since 2016, the first annual payment was HK$0.042, compared to HK$0.12 for the last annual payment. This equates to a compound annual growth rate (CAGR) of approximately 19% per year during this period. Despite rapid dividend growth over the past few years, we have also seen payouts decline in the past, which makes us cautious.
The dividend should increase
With a relatively volatile dividend, it is even more important to assess whether earnings per share are increasing, which could indicate dividend growth in the future. Modern Dental Group has seen EPS increase over the past five years, at 30% per year. A low payout ratio gives the company great flexibility, and the growth in earnings also allows it to increase the dividend very easily.
We really like the Modern Dental Group dividend
We generally don’t like to see the dividend cut, especially when the company has such high potential as Modern Dental Group. The cut will allow the company to continue paying the dividend without putting pressure on the balance sheet, meaning it could remain sustainable for longer. Considering all of that, it looks like a good dividend opportunity.
Investors generally tend to favor companies with a consistent and stable dividend policy as opposed to those with an irregular one. However, there are other things for investors to consider when analyzing stock performance. For example, we identified 2 warning signs for Modern Dental Group which you should be aware of before investing. Looking for more high yield dividend ideas? Try our collection of strong dividend payers.
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