Sealand Securities' (SZSE:000750) Upcoming Dividend Will Be Larger Than Last Year's

The board of Sealand Securities Co., Ltd. (SZSE:000750) has announced that the dividend on 3rd of June will be increased to CN¥0.04, which will be 14% higher than last year's payment of CN¥0.035 which covered the same period. Despite this raise, the dividend yield of 1.3% is only a modest boost to shareholder returns.

See our latest analysis for Sealand Securities

Sealand Securities Is Paying Out More Than It Is Earning

If it is predictable over a long period, even low dividend yields can be attractive. Prior to this announcement, the company was paying out 134% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 4.1%. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.

EPS is set to fall by 7.5% over the next 12 months if recent trends continue. Assuming the dividend continues along recent trends, we believe the payout ratio could reach 138%, which could put the dividend under pressure if earnings don't start to improve.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The payments haven't really changed that much since 10 years ago. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.

Dividend Growth Is Doubtful

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. In the last five years, Sealand Securities' earnings per share has shrunk at approximately 7.5% per annum. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits.

An additional note is that the company has been raising capital by issuing stock equal to 17% of shares outstanding in the last 12 months. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

The Dividend Could Prove To Be Unreliable

In summary, while it's always good to see the dividend being raised, we don't think Sealand Securities' payments are rock solid. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. Overall, we don't think this company has the makings of a good income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, Sealand Securities has 4 warning signs (and 1 which is significant) we think you should know about. Is Sealand Securities not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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