Today we’ll take a closer look at KPa-BM Holdings Limited (HKG:2663) from a dividend investor’s perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. If you are hoping to live on your dividends, it’s important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you’ll find our analysis useful.
With a four-year payment history and a 6.4% yield, many investors probably find KPa-BM Holdings intriguing. It sure looks interesting on these metrics – but there’s always more to the story . Some simple analysis can offer a lot of insights when buying a company for its dividend, and we’ll go through this below.
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. Looking at the data, we can see that 23% of KPa-BM Holdings’s profits were paid out as dividends in the last 12 months. We like this low payout ratio, because it implies the dividend is well covered and leaves ample opportunity for reinvestment.
We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. KPa-BM Holdings paid out 120% of its free cash flow last year, which we think is concerning if cash flows do not improve. While KPa-BM Holdings’s dividends were covered by the company’s reported profits, free cash flow is somewhat more important, so it’s not great to see that the company didn’t generate enough cash to pay its dividend. Cash is king, as they say, and were KPa-BM Holdings to repeatedly pay dividends that aren’t well covered by cashflow, we would consider this a warning sign.
While the above analysis focuses on dividends relative to a company’s earnings, we do note KPa-BM Holdings’s strong net cash position, which will let it pay larger dividends for a time, should it choose.
Remember, you can always get a snapshot of KPa-BM Holdings’s latest financial position, by checking our visualisation of its financial health.
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the data, we can see that KPa-BM Holdings has been paying a dividend for the past four years. The dividend has not fluctuated much, but with a relatively short payment history, we can’t be sure this is sustainable across a full market cycle. During the past four-year period, the first annual payment was HK$0.015 in 2016, compared to HK$0.016 last year. This works out to be a compound annual growth rate (CAGR) of approximately 1.6% a year over that time.
It’s good to see at least some dividend growth. Yet with a relatively short dividend paying history, we wouldn’t want to depend on this dividend too heavily.
Dividend Growth Potential
While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend’s purchasing power over the long term. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see KPa-BM Holdings has grown its earnings per share at 26% per annum over the past five years. Earnings per share have grown rapidly, and the company is retaining a majority of its earnings. We think this is ideal from an investment perspective, if the company is able to reinvest these earnings effectively.
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. Firstly, the company has a conservative payout ratio, although we’d note that its cashflow in the past year was substantially lower than its reported profit. We were also glad to see it growing earnings, although its dividend history is not as long as we’d like. Ultimately, KPa-BM Holdings comes up short on our dividend analysis. It’s not that we think it is a bad company – just that there are likely more appealing dividend prospects out there on this analysis.
You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in KPa-BM Holdings stock.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.