Should You Buy Hong Kong Shanghai Alliance Holdings Limited (HKG:1001) For Its Dividend?

Is Hong Kong Shanghai Alliance Holdings Limited (HKG:1001) 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 high yield and a long history of paying dividends is an appealing combination for Hong Kong Shanghai Alliance Holdings. It would not be a surprise to discover that many investors buy it for the dividends. Some simple research can reduce the risk of buying Hong Kong Shanghai Alliance Holdings for its dividend - read on to learn more.

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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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Hong Kong Shanghai Alliance Holdings paid out 156% of its profit as dividends, over the trailing twelve month period. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Unfortunately, while Hong Kong Shanghai Alliance Holdings pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.

We update our data on Hong Kong Shanghai Alliance Holdings every 24 hours, so you can always get our latest analysis of its financial health, 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. For the purpose of this article, we only scrutinise the last decade of Hong Kong Shanghai Alliance 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$0.06 in 2010, compared to HK$0.02 last year. The dividend has fallen 67% over that period.

We struggle to make a case for buying Hong Kong Shanghai Alliance 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. Hong Kong Shanghai Alliance Holdings's earnings per share have shrunk at 43% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Hong Kong Shanghai Alliance Holdings's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Hong Kong Shanghai Alliance Holdings's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. It's a concern to see that the company paid out such a high percentage of its earnings and cashflow as dividends. Earnings per share are down, and Hong Kong Shanghai Alliance Holdings's dividend has been cut at least once in the past, which is disappointing. In this analysis, Hong Kong Shanghai Alliance Holdings doesn't shape up too well as a dividend stock. We'd find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Hong Kong Shanghai Alliance Holdings has 6 warning signs (and 2 which are potentially serious) we think you should know about.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding 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.