Launch Tech's (HKG:2488) Shareholders Will Receive A Smaller Dividend Than Last Year

Launch Tech Company Limited's (HKG:2488) dividend is being reduced from last year's payment covering the same period to CN¥0.2185 on the 13th of September. The dividend yield of 9.2% is still a nice boost to shareholder returns, despite the cut.

While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Investors will be pleased to see that Launch Tech's stock price has increased by 69% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.

Check out our latest analysis for Launch Tech

Launch Tech's Dividend Is Well Covered By Earnings

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Launch Tech's dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 216% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.

EPS is set to grow by 28.7% over the next year if recent trends continue. If the dividend continues along recent trends, we estimate the payout ratio could reach 78%, which is on the higher side, but certainly still feasible.

Launch Tech's Dividend Has Lacked Consistency

Launch Tech has been paying dividends for a while, but the track record isn't stellar. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. Since 2017, the dividend has gone from CN¥0.167 total annually to CN¥0.40. This implies that the company grew its distributions at a yearly rate of about 13% over that duration. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.

The Dividend Looks Likely To Grow

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Launch Tech has impressed us by growing EPS at 29% per year over the past five years. Fast growing earnings are great, but this can rarely be sustained without some reinvestment into the business, which Launch Tech hasn't been doing.

In Summary

Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We would probably look elsewhere for an income investment.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 2 warning signs for Launch Tech that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.