Dividend paying stocks like Willas-Array Electronics (Holdings) Limited (SGX:BDR) 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. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.
With Willas-Array Electronics (Holdings) yielding 8.4% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. It would not be a surprise to discover that many investors buy it for the dividends. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable – hardly an ideal situation. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Although Willas-Array Electronics (Holdings) pays a dividend, it was loss-making during the past year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.
Willas-Array Electronics (Holdings)’s cash payout ratio last year was 4.5%, which is quite low and suggests that the dividend was thoroughly covered by cash flow.
Remember, you can always get a snapshot of Willas-Array Electronics (Holdings)’s latest financial position, by checking our visualisation of its financial health.
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of Willas-Array Electronics (Holdings)’s dividend payments. The dividend has been cut on at least one occasion historically. During the past ten-year period, the first annual payment was HK$0.45 in 2010, compared to HK$0.20 last year. This works out to be a decline of approximately 7.8% per year over that time. Willas-Array Electronics (Holdings)’s dividend hasn’t shrunk linearly at 7.8% per annum, but the CAGR is a useful estimate of the historical rate of change.
We struggle to make a case for buying Willas-Array Electronics (Holdings) for its dividend, given that payments have shrunk over the past ten years.
Dividend Growth Potential
Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Willas-Array Electronics (Holdings) has grown its earnings per share at 6.3% per annum over the past five years. It’s good to see decent earnings growth and a low payout ratio. Companies with these characteristics often display the fastest dividend growth over the long term – assuming earnings can be maintained, of course.
To summarise, shareholders should always check that Willas-Array Electronics (Holdings)’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We’re not keen on the fact that Willas-Array Electronics (Holdings) paid dividends despite reporting a loss over the past year, although fortunately its dividend was covered by cash flow. Second, earnings growth has been ordinary, and its history of dividend payments is chequered – having cut its dividend at least once in the past. While we’re not hugely bearish on it, overall we think there are potentially better dividend stocks than Willas-Array Electronics (Holdings) out there.
See if management have their own wealth at stake, by checking insider shareholdings in Willas-Array Electronics (Holdings) stock.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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