Is Hong Kong Exchanges and Clearing Limited’s (HKG:388) 2.5% Dividend Worth Your Time?

Is Hong Kong Exchanges and Clearing Limited (HKG:388) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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.

A 2.5% yield is nothing to get excited about, but investors probably think the long payment history suggests Hong Kong Exchanges and Clearing has some staying power. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Explore this interactive chart for our latest analysis on Hong Kong Exchanges and Clearing!

SEHK:388 Historical Dividend Yield, January 8th 2020
SEHK:388 Historical Dividend Yield, January 8th 2020

Payout ratios

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. 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 92% of Hong Kong Exchanges and Clearing’s profits were paid out as dividends in the last 12 months. This is quite a high payout ratio that suggests the dividend is not well covered by earnings.

Consider getting our latest analysis on Hong Kong Exchanges and Clearing’s financial position here.

Dividend Volatility

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. Hong Kong Exchanges and Clearing has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having fallen by at least 20% one or more times over this time. During the past ten-year period, the first annual payment was HK$4.29 in 2010, compared to HK$6.71 last year. This works out to be a compound annual growth rate (CAGR) of approximately 4.6% a year over that time. Hong Kong Exchanges and Clearing’s dividend payments have fluctuated, so it hasn’t grown 4.6% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company’s earnings are not consistent.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. It’s good to see Hong Kong Exchanges and Clearing has been growing its earnings per share at 13% a year over the past five years. Although earnings per share are up nicely Hong Kong Exchanges and Clearing is paying out 92% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.

Conclusion

Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Hong Kong Exchanges and Clearing is paying out a larger percentage of its profit than we’re comfortable with. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. Hong Kong Exchanges and Clearing might not be a bad business, but it doesn’t show all of the characteristics we look for in a dividend stock.

Earnings growth generally bodes well for the future value of company dividend payments. See if the 15 Hong Kong Exchanges and Clearing analysts we track are forecasting continued growth with our free report on analyst estimates for the company.

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 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.